HNRG 10-Q Quarter ended Sept. 30, 2021

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, 2021 , are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2021 .  To maintain consistency and comparability, certain 2020 amounts have been reclassified to conform to the 2021 presentation, with no impact to cash provided by operating activities or net income (loss).

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 2020 Annual Report on Form 10 -K . This quarterly report should be read in conjunction with such Annual Report on Form 10 -K.

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.

We announced in June 2021 an agreement to join with Hoosier Energy Rural Electric Cooperative, Inc. to begin developing renewable power in 2023.

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, 2021 , there were no impairment charges recorded for long-lived assets.

Hourglass Sands

We recorded an impairment of $ 2.9 million as of December 31, 2019, due to softness in the pricing of the frac sand market.  The impairment included inventory, land, mine development, buildings and equipment and was determined using a market approach.  The remaining fair market value of inventory, equipment, and buildings at Hourglass Sands was $ 1.9 million as of December 31, 2019. Due to the continued regression of the frac sand market, in August 2020 we ceased operations of the plant and recorded an impairment of $ 1.8 million for the quarter ended September 30, 2020, which included the remaining inventory and buildings and which was determined using a market approach.

Inventory is valued at lower of average cost or net realizable value (NRV).  As of September 30, 2021 , and December 31, 2020 , coal inventory includes NRV adjustments of $ 2.7 million and $ 1.6 million, respectively, a majority of which resulted from utilizing low sulfur coal from our Ace in the Hole mine which was necessary to blend with Oaktown coal to ship to and create additional opportunities in the southeast market.

Bank debt is comprised of term debt ($ 40.4 million as of September 30, 2021 ) and a $ 120 million revolver ($ 74.5 million borrowed as of September 30, 2021 ).  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, 2021 , we had additional borrowing capacity of $ 37.1 million and total liquidity of $ 41.7 million.  Our additional borrowing capacity is net of $ 5.7 million in outstanding letters of credit as of September 30, 2021 , that were required to maintain surety bonds.  Liquidity consists of our additional borrowing capacity and cash and cash equivalents.

Fees

Unamortized bank fees and other costs incurred in connection with the initial facility and subsequent amendments totaled $ 7.9 million as of our amendment in April 2020. Additional fees of $ 0.4 million were incurred in May 2021 for a technical amendment related to our entry into the renewable power market.  These costs were deferred and are being amortized over the term of the loan. Unamortized costs as of September 30, 2021 , and December 31, 2020 , were $ 4.6 million and $ 6.1 million, respectively.

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

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:

As of September 30, 2021 , our Leverage Ratio of 2.29 was in compliance with the requirements of the credit agreement.

The credit facility also 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 1.05 to 1.00 through December 31, 2021, at which time it increases to 1.25 to 1.00 through the maturity of the credit facility.

As of September 30, 2021 , our Debt Service Coverage Ratio of 1.15 was in compliance with the requirements of the credit agreement.

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. At September 30, 2021 , we are paying LIBOR at the swap rate of 2.92 % plus 4.0 % for a total interest rate of 6.92 % on the hedged amount ($ 93.1 million) and 4.0 % on the remainder ($ 21.8 million).

Paycheck Protection Program

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

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

On July 23, 2021, we received a notification from the Lender that the SBA approved our PPP Loan forgiveness application for the entire PPP Loan balance of $ 10 million, together with interest accrued thereon. The Lender notified us that the forgiveness payment was received on July 26, 2021. The forgiveness of the PPP Loan is being recognized during the Company’s third fiscal quarter ending September 30, 2021.

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.

At December 31, 2020, the PPP loan totaling $ 10 million is presented as current and long-term liabilities on the condensed consolidated balance sheets based upon the schedule of repayments and excluding any possible forgiveness of the loan.

Revenue from Contracts with Customers

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

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

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

Disaggregation of Revenue

Revenue is disaggregated by primary geographic markets, as we believe this best depicts how the nature, amount, timing, and uncertainty of our revenue and cash flows are affected by economic factors. 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. 75 % of our coal revenue for the three and nine months ended September 30, 2020 , respectively, was sold to customers in the State of Indiana with the remainder sold to customers in Florida, Georgia, North Carolina, and Tennessee.

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 $ 573 million, which represent the average fixed prices on our committed contracts as of September 30, 2021 . We expect to recognize approximately 57 % of this revenue in 2021 and 2022, with the remainder recognized thereafter.

We have remaining performance obligations relating to contracts with price re-openers of approximately $ 122 million, which represents our estimate of the expected re-opener price on committed contracts as of September 30, 2021 . We expect to recognize all of this revenue between 2025 and 2027.

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

Contract Balances

Under ASC 606, the timing of when a performance obligation is satisfied can affect the presentation of accounts receivable, contract assets, and contract liabilities. The main distinction between accounts receivable and contract assets is whether consideration is conditional on something other than the passage of time. A receivable is an entity’s right to consideration that is unconditional. Under the typical payment terms of our contracts with customers, the customer pays us a base price for the coal, increased or decreased for any quality adjustments. Amounts billed and due are recorded as trade accounts receivable and included in accounts receivable in our condensed consolidated balance sheets. 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. This deferred revenue is included in accounts payable and accrued liabilities in our condensed consolidated balance sheets when consideration is received, and revenue is not recognized until the performance obligation is satisfied. We are rarely paid in advance of performance and do not currently have any deferred revenue recorded in our condensed consolidated balance sheets.

For the nine months ended September 30, 2021, and 2020, 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 three and nine months ended September 30, 2021 , and 2020 was ~ 31% and ~ 69% , 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.

For the three and nine months ended September 30, 2021 , our stock compensation was $ 0.3 million and $ 0.8 million, respectively.  For the three and nine months ended September 30, 2021 , our stock compensation was $ 0.3 million and $ 0.9 million, respectively.

Non-vested RSU grants will vest as follows:

The outstanding RSUs have a value of $ 0.9 million based on the September 30, 2021 , closing stock price of $ 2.96 .

At September 30, 2021 , we had 1,448,416 RSUs available for future issuance.

We have operating leases for office space and processing facilities (expired in 2020 ) with remaining lease terms ranging from approximately two years to approximately three years. 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):

Future minimum lease payments under non-cancellable leases as of September 30, 2021 , were as follows:

At September 30, 2021 , and December 31, 2020 , we had approximately $ 471,000 and $ 602,000 , respectively, of right-of-use operating lease assets recorded within “buildings and equipment” on the condensed consolidated balance sheets.

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 $ 278 million and $ 269 million as of September 30, 2021 , and December 31, 2020 , respectively.

Restricted cash of $ 3.2 million and $ 4.0 million as of September 30, 2021 , and December 31, 2020 , respectively, represents cash held and controlled by a third party and is restricted for future workers’ compensation claim payments.

We compute net income (loss) per share using the two -class method, which is an allocation formula that determines net income (loss) per share for common stock and participating securities, which for us are our outstanding RSUs.

The following table (in thousands, except per share amounts) sets forth the computation of net income (loss) per share:

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 fuel hedges and interest rate swaps, and impairment measurements.  The fair values of our hedges and swaps were estimated using discounted cash flow calculations based upon forward fuel prices and interest-rate yield curves.  The notional values of our two interest rate swaps were $ 52.7 million and $ 40.4 million as of September 30, 2021 , both with maturities of May 2022. Fuel hedges include 0.2 million gallons of diesel fuel that are subject to pricing fluctuations with a minimum of $1.79/gallon and a maximum of $2.00/gallon through December 2021. 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. The Company also recorded impairments during Q3 2020 which incorporate Level 3 non-recurring fair value measures as further discussed in Note 2.

The following table summarizes our financial assets and liabilities measured on a recurring basis at fair value at September 30, 2021 , and December 31, 2020 , by the respective level of the fair value hierarchy (in thousands):

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

*Recorded in accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets.

We own a 50 % interest in Sunrise Energy, LLC, which owns gas reserves and gathering equipment with plans to develop and operate such reserves. Sunrise Energy also plans to develop and explore 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, 2021 , and December 31, 2020 , was $ 3.3 million and $ 3.2 million, respectively.

In February 2018, we invested $ 4 million in Hourglass Sands, LLC (Hourglass), a frac sand mining company in the State of Colorado. We own 100 % of the Class A units and are consolidating the activity of Hourglass in these statements. Class A units are entitled to 100 % of profit until our capital investment and interest is returned, then 90 % of profits are allocated to us with remainder to Class B units. We do not own any Class B units.

In February 2018, a Yorktown company associated with one of our directors also invested $ 4 million in Hourglass in return for a royalty interest in Hourglass. This investment, coupled with our $ 4 million investment, brings the initial capitalization of Hourglass to $ 8 million. We report the royalty interest as a redeemable noncontrolling interest in the consolidated balance sheets. A representative of the Yorktown company holds a seat on the board of managers, and, with a change of control, the Yorktown company may be entitled to receive a portion of the net proceeds realized, as prescribed in the Hourglass operating agreement.

In December 2019, we recorded an impairment to Hourglass Sands of $ 2.9 million.  In August 2020, we ceased operation of the plant and recorded an additional impairment of $ 1.8 million. See Note 2 to these consolidated financial statements for further discussion.