As filed with the U.S. Securities and Exchange Commission on
July 12, 2016
August 29, 2018
Registration No.333-226042
SECURITIES AND EXCHANGE COMMISSION
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
NGFC Equities, Inc.
-------------------------------------------
American Resources Corporation
(Exact name of registrant as specified in its charter)
-----------------------------------------
| Florida | 1200 | 46-3914127 |
Florida
| 7600
| 46-3914127
|
(State or other jurisdiction of incorporation
or organization) | (Primary Standard Industrial
Classification Code Number) | (I.R.S. Employer
Identification Number) |
45 Almeria Avenue,
Coral Gables, FL 33134
-----------------------------------------
9002 Technology Lane
Fishers, IN 46038
Tel.:
(305) 430-6103(317) 855-9926
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
-----------------------------------------
7135 Collins
Avenue,Ave., No. 624
Tel.:
(305) 865-8193(317) 855-9926
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
As soon as practicable after this registration statement becomes effective
(
-----------------------------------------
Copies to:
Clifford J. Hunt Law Office of Clifford J. Hunt, P.A. 8200 Seminole Boulevard Seminole, Florida 33772 (727) 471-0444 |
----------------------------------------
Approximate date of commencement of proposed sale of the securities to the public)
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:x☑
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act,
please 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,
or a smaller reporting
company:
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 ☑ | x
|
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. ☑
CALCULATION OF REGISTRATION FEE
| | | | | | | | | | | | | | | | |
Title of Each Class of
Securities to be Registered | | Amount
To Be
Registered (1) | | | Proposed
Maximum
Offering Price
Per Unit | | | Proposed
Maximum
Aggregate
Offering Price | | | Amount of
Registration
fee (2) | |
| | | | | | | | | | | | | | | | |
Class A Common Stock par value $0.0001 per share | | | 7,500,000 | | | | $0.40 | | | | $3,000,000 | | | | $348.60 | (3) |
| | |
| (1)
| To the extent permitted by Rule 416, this registration statement also covers such additional number
------------------------------------------------------------------- | Title of Each Class of Securities to be Registered | Amount To Be Registered (1) | Proposed Maximum Offering Price Per Share (2) | Proposed Maximum Aggregate Offering Price | Amount of Registration Fee (3) | | Common stock, par value $0.0001 per share | 40,000,000 | $1.20 | $48,000,000 | $5,976.00
|
(1) Estimated pursuant to Rule 457(a) under the Securities Act of shares of Class A common stock as may be issuable in the event of stock splits, stock dividends or similar transactions. |
| | |
| (2)
| The registration fee for securities is based on an estimate of the aggregate offering price of the securities, assuming the sale of the securities at the midpoint of the high and low anticipated offering prices set forth in the prospectus, and such estimate is solely for the purpose of calculating the registration fee pursuant to Rule 457.
|
| | |
| (3)
| Such fee has already been paid by NGFC Equities, Inc.
|
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 WHICH 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 THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A)as amended.
(2)
Estimated solely for the purpose of calculating the registration fee.
(3)
Pursuant to Rule 457(p) offset, the registrant previously paid $3,706.80 of the total registration fee in connection with a previous filing of a registration statement, MAY DETERMINE.file number 333-192590 on November 27, 2013,
resulting in $2,269.20 due by the registrant. 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
--------, 2016
OCTOBER 16, 2018
PRELIMINARY PROSPECTUS
![[ngfceqline_s1a7v5002.gif]](https://capedge.com/proxy/S-1A/0001590715-16-000115/ngfceqline_s1a7v5002.gif)
NGFC Equities, Inc.
7,500,000 shares of
40,000,000 Shares
American Resources Corporation
______________________
This prospectus relatesis 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 resale ofOTC Markets under the ticker AREC. We are selling up to 7,500,000 40,000,000 shares of our class A common stock, par value $0.0001 per share, by Southridge Partners II, LP (“Southridge”), whichCommon Stock. There are Put Shares that we will put to Southridge pursuant to the Purchase Agreement. Southridge may also be referred to in this document as the Selling Security Holder.
The Purchase Agreement with Southridge provides that Southridge is committed to purchase up to $3 million of our common stock. We may draw on the facility from time to time, as and when we determine appropriate in accordance with the terms and conditions of the Purchase Agreement. This portion was calculated as approximately 33% of the Company's public float as of March 29, 2016.
The Put Shares included in this prospectus represent a portion of the shares issuable to Southridge under the Purchase Agreement.
Southridge is an “underwriter” within the meaning of the Securities Act in connection with the resale of our common stock under the Purchase Agreement. No other underwriter or person has been engaged to facilitate the sale of shares of our common stockno selling shareholders in this offering. This
The public offering will terminate 24 months after the registration statement to which this prospectus is made a part is declared effective by the SEC. Southridge will pay us 90%price of the lowest closingCommon Stock is expected to be $1.20 per share. Our common stock is currently quoted on the OTC Market Group, Inc.’s OTCQB tier under the symbol “AREC”. On June 29, 2018, the last reported sale price of our common stock for the ten trading days immediately following the clearing date associated with the applicable Put Notice.We will not receive any proceeds from the sale of these shares of common stock offered by Selling Security Holder. However, we will receive proceeds from the sale of our Put Shares under the Purchase Agreement. The proceeds will be used for general administrative expense, to audit and acquire businesses as well as for accounting and audit fees.
We will bear all costs associated with this registration.
Our Common Stock is listed on OTCQB under the trading symbol NGFF. On December 1, 2015, the last reported sale price for our common stock as reported on the OTCPINK (where our stock was trading at the time) was $0.40$1.15 per share. We got listed on OTCQB on May 17, 2016. OTCQB® is a Venture Market is for entrepreneurial and development stage U.S. and international companies. To be eligible, companies must be current in their reporting and undergo an annual verification and management certification process. These standards provide a strong baseline of transparency, as well as the technology and regulation to improve the information and trading experience for investors. Companies must meet a minimum $0.01 bid price test and may not be in bankruptcy.
We are an “emerging growth company”
underas that term is used in the
federal securities lawsJumpstart Our Business Startups Act of 2012, and
will be subjectas such, we have elected to
take advantage of certain reduced public company reporting
requirements. We are not a shell company.requirements for this prospectus and future filings. See “Risk Factors” and “Prospectus Summary—Emerging Growth Company.”
Investing in our
Common Stockcommon stock involves
a high degree of risk.risks. See “Risk Factors”
beginning on page
4 of this prospectus.7.
Neither the
U.S. Securities and Exchange Commission
(the “SEC”) 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.
______________________
The date of this prospectus is
------, 2016
October 16, 2018
-----------------------------------------
You should rely only on the information contained in this prospectus. Weprospectus and any free writing prospectus prepared by us or on behalf of us or the information to which we have notreferred you. Neither we, nor the underwriters (if any underwriters are engaged, which we have no agreements or plans to engage at this time) have authorized anyone to provide you with information different information from that contained in this prospectus and any free writing prospectus. Southridge isWe 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 (if any underwriters are engaged, which we have no agreements or plans to engage at this time) are offering to sell shares of common stock and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of ourthe common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
This prospectus doescontains 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.”
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” or “Common stock” refers to Class A Common shares 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 shares. 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 constituteclassified 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 or a solicitation of an offer to buy thethese securities in any circumstances under whichjurisdiction where the offer or solicitationsale is unlawful. Neithernot 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
deliverySecurities Exchange Commission (“SEC”), available free of
this prospectus nor any distribution of securities in accordancecharge through a link on our website as soon as reasonably practicable after those reports and other information are electronically filed with
this prospectus shall, under any circumstances, imply that there has been no change in our affairs sinceor furnished to the
date of this prospectus.
We will receive no proceeds from the sale of the shares of common stock sold by Southridge. However, we will receive proceeds from the sale of securities pursuant to our exercise of the Put Right.
OTHER INFORMATION
We maintain our web site at www.NGFCE.com.SEC. Information on such web siteour website or any other website is not consideredincorporated by reference into, and does not constitute a part of, this prospectus. Unless specifically set forth to the contrary, when used in this prospectus the terms “NGFC Equities, Inc.”, “we”, “us”, “our” and similar terms refer to NGFC Equities, Inc., a Florida corporation.
SUMMARY INFORMATION, RISK FACTORS AND RATIO OF EARNINGS TO FIXED CHARGES
| | |
Shares ofTotal common stock offered By Southridge:
by the Company | | 7,500,000 shares of the Company’s Class A Common Stock.
|
| | |
Common stock to be outstanding after the offering:
| | Up to 25,592,674 40,000,000 shares of Class A common stock & 7,000,000 Class B common stock.Common Stock. |
| Use of proceeds | | We expect to receive approximately $48 million of net proceeds, based upon the offering price of $1.20 per share.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.” |
Use of proceeds:
Dividend policy | | We will
While we have not receivepaid any proceeds from the sale of the shares of common stock offered by Selling Security Holder. However, we will receive proceeds from sale ofdividends 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 OTCQB tier under the Purchase Agreement. See “Use of Proceeds.”ticker “AREC”. |
| Risk factors | | |
Offering Period:
| | FromYou should carefully read and consider the date of this prospectus until Two Years, unless extended byinformation set forth under the Company for an additional 90 days in its sole discretion.
|
| | |
OTCQB Trading Symbol:
| | NGFF
|
| | |
Risk Factors:
| | Investing in our Common Stock involves a high degree of risk. Please refer to the sectionsheading “Risk Factors” and “Dilution”all other information set forth in this prospectus before making an investmentdeciding to invest in our Common Stock.
common stock. |
Past Transactions With Southridge Partners II, LP
We have
The information above does not
done any transactions with Southridge Partners II, LP or its affiliates.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.
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
our current business acquisitionFinancial Condition and
operations cost indicateResults 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
reasonable requirementpublic offering price of
US $3,000,000 or less. Based on market response to our products and services, it is management’s opinion that we will not require additional funding.
PROSPECTUS SUMMARY
$1.20 per common share.
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. Since inception,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
has been engaged in organizational efforts and
obtaining initial financing. When we formed our company our focus was to (i) construct and/or purchase and manage a chain of combined gasoline, diesel and natural gas (NG) fueling and service stations (initially, in the Miami, FL area); (ii) construct conversion factories to convert NG to liquefied natural gas (LNG) and compressed natural gas (CNG); and (iii) construct conversion factories to retrofit vehicles currently using gasoline or diesel fuel to also run on NG in the United States and also to build a convenience store to serve our customers in each of our locations. We define each of such combined stations an “Operational Unit.”
1
At a Board of Directors meeting held on February 16, 2015, the Company chose to diversify its operations by adding two additional divisions to its original business strategy to set up three divisions as follows:
Energy and Retail Division
Healthcare Division
Consulting Division
On March 24, 2015, the Company set up NGFC Limited Partnership (“NGLP”, “the Partnership”) with the Company acting as the General Partner. One objective of the Partnership was to raise funds in the private market through any exempt offerings to acquire gasoline stations that the Partnership would lease back to the Company to earn a fixed return. The Partnership also has invested a portion of its funds in the financial markets.
The Board of Directors, at a meeting held on May 19, 2016, approved NGFC to resign as the general partner of NGLP since in the event the investment by NGLP in public company stocks to be more than 40% of the total assets, that may require us to register NGFC under the Investment Company Act of 1940, that we would like to avoid since the purpose of NGFC is to acquire companies to operate through subsidiaries and not be a passive investor while it is more practical for NGLP to make a better return on the money NGLP is holding by investing in any alternative investments while NGLP still consider acquiring land and building that house operating gasoline stations to rent to Energy and Retail division of NGFC to get a fixed return on their money.
At the Board meeting held on May 19, 2016, following resolutions were approved:
1.
To appoint I. Andrew Weeraratne the CEO of NGFC as a general partner of NGLP and transfer the profit interest of NGFC to Mr. Weeraratne.
2.
To deconsolidate NGLP in filing future financial statements of NGFC.
3.
For NGFC to resign as general partner of NGFC.
4.
To keep the option the current Limited Partners of NGLP have as of May 20, 2016 to convert 100% of their capital to NGFC shares at $0.30 per shares by March 31, 2017 effective even after deconsolidation of NGLP. If this conversion feature was executed by all 14 limited partners then their total capital (if any of them did not withdraw prior to March 31, 2017) of $535,350 could be converted at $0.30 cents per share to 1,784,500 shares of Class A Common Stock of NGFC.
5.
Not to grant this option to convert limited partnership interest to shares of NGFC to any additional contributions to NGLP since NGFC is no longer will consolidate or will be the primary beneficiary of NGLP.
We filed a Form 8-K on May 20, 2016 announcing the above resolutions but later discovered that we made an error when NGFC resigned as general partner of NGLP without giving 30-days written notice to all limited partners as required by the NGLP Partnership Agreement, and therefore we filed an amended Form 8-K on July 11, 2016 withdrawing the resignation of NGFC as general partner. But since due to other resolutions approved and announced through that Form 8-k filed on May 20, 2015, were according to the partnership agreement, the deconsolidation of NGLP will go ahead as planned since as per Consolidation Topic 810 released on February 2015 by Financial Accounting Standard Board, being general partner of a partnership itself does not require the reporting person to consolidate the partnership. We plan to give the 30-days written notice to all limited partners the decision of NGFC to resign as general partner and then resign formally and file announcement with the SEC.
Since we consider this deconsolidation to be material, we have included pro forma information giving effect to our surrender of control over NGLP and its subsequent deconsolidation beginning Page No F-21 following the Financial Statements and have referred to that at various places in this prospectus.
Energy and Retail Division
Through our Energy and Retail Division, we have been conducting due diligence on several existing fueling stations in the Miami, Florida area which the Company believes are suitable acquisition targets. However, it remains the Company’s preference to purchase land and build an Operational Unit based on our own designs. With the proceeds in this offering, we plan to acquire land and building that houses a gasoline and diesel fuel station with a convenience store and collect rent if possible while our consulting division handles all accounting so as to keep an eye on the business, while we raise additional money to build our Operational Units that we estimate to cost about $5,800,000 per Operational Unit. Currently we have no other commitments to get the funds to build our operational units and thus it may depend on us building a track record in owning a smaller gasoline and diesel fuel station that we would rent successfully and/or due to our exposure to potential investors by being in the business, for which there is no guarantee.
Our initial primary focus will be distributing gasoline and diesel fuel to customers once we build or purchase a fueling station, as we believe there are not enough NG driven vehicles in the market at this time to substantiate building only a NG station. We also plan to have liquefied natural gas (LNG) and compressed natural gas (CNG) available for NG driven vehicles as we think NG vehicles will be
2
as common as gasoline-driven vehicles in the future. Therefore, we may acquire existing gasoline and diesel fueling stations and expand them to include NG fueling capabilities. In certain stations we plan to build (or acquire and expand), we may have gasoline and LNG only, in some stations we may have gasoline and CNG only and in other stations we may have the means to distribute gasoline, diesel, LNG and CNG. Such determination will be made based on different factors such as the demand for LNG and/or CNG in each location and easy access to LNG and CNG supplies. We believe that NG business is poised to go through significant changes in the near future and we plan to operate an extensive research department dedicated to our company adopting relevant changes as the market evolves.
When we began we were planning to construct, own and operate factories to convert NG from its gaseous state to LNG (through a process of cooling NG) to be distributed to our own fueling stations and also to fueling stations owned by other independent owners and companies. However, due to the current decline of prices in energy, we do not believe it would be viable for us to continue with this strategy and thus we plan to hold off our plans on that.
Also when we began our business in late 2013, we were planning to operate a vehicle conversion business through a joint venture relationship with Shenzhen HJ Technology Company Ltd. (“HJT”), which is currently operating a series of factories converting vehicles to operate on LNG and CNG in the Peoples’ Republic of China (“PRC” or “China”), using its patented Gas Intelligent Electric Control System (GIECS) technology. Since then we have come across a few other conversion kits from other manufacturers and looked into using other conversion kits in our planned vehicle conversion division. However, due to current decline in price of gasoline, we feel the vehicle conversion business may no longer be profitable and thus plan to hold off on that strategy as well.
On May 18, 2015 we formed VanguardQuest Energy Inc. (VE) in San Clemente, California as 55% stockholder with an individual Michael Laub as 45% stockholder to conduct some of the business in our Energy and Retail Division through VE. Mr. Laub is the founder and Chief Executive Officer of CNG United LLC based in San Clemente, California that deals in training installation of engines for gasoline vehicles to run on Natural Gas as well as safety and maintenance of hybrid engines and vehicles. On the 23rd of January 2016, the Board of Directors decided to discontinue the operation of VE, due to the same reasons we have given to holding off the vehicle conversion division, and have Mr. Laub who currently manages CNG United LLC work as, a consultant for NGFC. The financial cost of setting up and discontinuing VE had been minimal for us due to the expertise of our staff in forming the corporation, handling most administrative and filing obligations through our internal team.
Healthcare Division
As part of our change in strategy, adopted in February 2015, the Company acquired 55% of ECI-LATAM INC. (“ECIL”). Began by an entrepreneur Goran Antic, ECIL wasprivate company incorporated in the State of Florida on March 25, 2014Indiana with offices at 9002 Technology Lane, Fishers IN 46038, and is engaged in installation and performing maintenance and repairsdue to the fulfillment of large medical equipment that deal in sterilization and disinfection. ECIL also sells spare parts, consumables and service contracts for medical establishments. As of now 100% of ECIL sales and services are performed outside the USA. Also 100%various conditions precedent to closing of the maintenance and repairs fortransaction, the period of these financial statements have been done only for the medical equipment belonging to Getinge Group, a public company based in Sweden who manufacture and distribute their own large medical equipment. Currently Mr. Antic is the sole employee of ECIL and act as its Chief Executive Officer and Chairmancontrol of the Board.
In May 2015 ECIL set up an “Animal Health Division,” to manufacture, package, market and distribute globally, an infection healing cream for dairy animals. In August 2015, this Animal Health DivisionCompany was transferred to the Quest Energy shareholders on February 7, 2017 resulting in Quest Energy becoming a separate corporation incorporated in the state of Florida entitled La Veles Inc. (“LVI”) with NGFC owning 73% of LVI. La Veles was planning on setting up a factory in the Republic of Serbia to manufacture this cream with Mr. Antic, who is fluent in Serbian language, acting as the Chief Executive Officer of La Veles Inc. However, the activation of this strategy did not proceed smoothly and in order to save time and cost, the Board on January 23rd, 2016 decided to be involved only with distribution of this anti-infection cream and also let ECIL directly handle the work through ECIL and not get La Veles Inc. be involved with it. ECIL currently has no formal agreement with the manufacturer of this Cream to distribute it. Currently LVI remains an inactive 100% ownedwholly-owned subsidiary of NGFC. The costARC. 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 setting up LVIour domestic and making it inactive had been minimal for us dueinternational 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
expertiseexport 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
staff in forming the corporation, handling most administrativecompany and
filing obligations through our internal team.
Consulting Division
Since our main strategy is to find businesses with significant upside to merge with or acquire to expand our operation, buying an existingits business with an experienced management team in place, we believe, is the most practical strategy. However, due to our size we can afford to buy only small businesses and often these small businesses do not keep proper accounting to put themselves through an audit under the SEC guidelines set forth by Public Accounting Oversight Board (PCAOB). We discovered that often it would cost too much money for a small business to hire an outside service to prepare their records acceptable enough to be audited by a PCAOB certified CPA firm under the guidelines set forth by PCAOB, precluding us from acquiring such companies due to not being able to audit them. Since we began searching for management teams to join us we found it more practical to acquire a company along with the management team to join as a wholly owned or majority owned subsidiary of our Company. That strategy requires us to get them
3
audited under PCAOB guidelines since a company is required to go through such an audit before a public company such as ours can acquire them. Hence, since we began, our management team, especially the CEO Andrew Weeraratne (who has extensive experience as a CPA, CFO and as a consultant), have been spending long hours going through and making needed adjustments to bring financial statementsactivities are deemed to be in accordancethe exploration stage until mineral reserves are defined on our properties.
Current Projects
Quest Energy has five 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”), and Quest Processing LLC (“Quest Processing”), all of which are located in eastern Kentucky within the Central Appalachian coal basin, with accounting standardsthe exception of ERC Mining Indiana Corporation, which is located in southwestern Indiana in the Illinois coal basin. Below is an organizational and writing accountingownership 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
procedureshigh-BTU, low sulfur, low moisture bituminous coal used for a
few companies that we have considered potential acquisitions targets. These actions have led us to set up our own consulting division, whereby we will invoice the businesses who would request us to help them get their records readyvariety of uses within several industries, including industrial customers, specialty products and thermal coal used for
PCAOB audits with us collecting such fees in cash or in the event we agree to acquire them by reducing the purchase price by the amount of unpaid consulting service fees.
Our Consulting Division will focus on identifying and organizing currently operating businesses to set up their accounting system to run them efficiently with the help of accurate and timely financial and management reports. We also plan to implement internal control procedures that will safeguard their assets and accounting procedures that will make their operation efficient and transparent that in turn will help them in the event they choose to get listed on the public market through joining us or on their own in the future. We also plan to write operating and internal control procedure manuals and disclosure check list manuals that will help small business owners to prepare for expansion as they find the needed capital to expand. We believe that these services will provide us cash flow and also introduce us to businesses we believe we may be able to acquire in exchange for cash and stock of our company. We believe our current management team has necessary experience to guide small businesses to overcome their problems and build successful businesses. We have provided such consulting services to two companies so far.
Since we began in October 2013 till June 2014 when our original form S-1 we filed with the Security and Exchange Commission (SEC) to raise funds got effective, our operations have been limited to our organizational activities, early stage implementation of our business plan and focusing on filing the S-1 and related documents with the Security and Exchange Commission. Since June 2014 to-date we have been filing various applications and documents with various States of the USA and Post Effective Amendments with the Security and Exchange Commission. Also we have spent considerable time installing internal control and administrative procedures for our company, installing and learning software to edgarize, XBRL and filing the quarterly and annual financial statements with the SEC. In addition, we have spent considerable time seeking out businesses we can either buy 100% or the majority ownership to begin our operations. As of December 31, 2015, we have not been able to invoice any clients to receive any cash for such consulting work but we hope to begin invoking and collecting for such services in the future.
NGFC Limited Partnership
On March 24, 2015, the Company set up NGFC Limited Partnership (“NGLP”, “the Partnership”) with the Company acting as the General Partner. One objective of the Partnership was to raise funds in the private market through any exempt offerings to acquire gasoline stations that the Partnership would lease back to the Company to earn a fixed return. The Partnership also has invested a portion of its funds in the financial markets.
The Board of Directors, at a meeting held on May 19, 2016, approved NGFC to resign as the general partner of NGLP since in the event the investment by NGLP in public company stocks to be more than 40% of the total assets, that may require us to register NGFC under the Investment Company Act of 1940, that we would like to avoid since the purpose of NGFC is to acquire companies to operate through subsidiaries and not be a passive investor while it is more practical for NGLP to make a better return on the money NGLP is holding by investing in any alternative investments while NGLP still consider acquiring land and building that house operating gasoline stations to rent to Energy and Retail division of NGFC to get a fixed return on their money.
At the Board meeting held on May 19, 2016, following resolutions were approved:
6.
To appoint I. Andrew Weeraratne the CEO of NGFC as a general partner of NGLP and transfer the profit interest of NGFC to Mr. Weeraratne.
7.
To deconsolidate NGLP in filing future financial statements of NGFC.
8.
For NGFC to resign as general partner of NGFC.
9.
To keep the option the current Limited Partners of NGLP have as of May 20, 2016 to convert 100% of their capital to NGFC shares at $0.30 per shares by March 31, 2017 effective even after deconsolidation of NGLP. If this conversion feature was executed by all 14 limited partners then their total capital (if any of them did not withdraw prior to March 31, 2017) of $535,350 could be converted at $0.30 cents per share to 1,784,500 shares of Class A Common Stock of NGFC.
10.
Not to grant this option to convert limited partnership interest to shares of NGFC to any additional contributions to NGLP since NGFC is no longer will consolidate or will be the primary beneficiary of NGLP.
We filed a Form 8-K on May 20, 2016 announcing the above resolutions but later discovered that we made an error when NGFC resigned as general partner of NGLP without giving 30-days written notice to all limited partners as required by the NGLP Partnership Agreement, and therefore we filed an amended Form 8-K on July 11, 2016 withdrawing the resignation of NGFC as general partner. But since due to other resolutions approved and announced through that Form 8-k filed on May 20, 2015, were according to the partnership agreement, the deconsolidation of NGLP will go ahead as planned since as per Consolidation Topic 810 released on
4
February 2015 by Financial Accounting Standard Board, being general partner of a partnership itself does not require the reporting person to consolidate the partnership. We plan to give the 30-days written notice to all limited partners the decision of NGFC to resign as general partner and then resign formally and file announcement with the SEC.
Since we consider this deconsolidation to be material, we have included pro forma information giving effect to our surrender of control over NGLP and its subsequent deconsolidation beginning Page No F-21 following the Financial Statements and have referred to that at various places in this prospectus.
electricity generation.
We are an “emerging growth company”
as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings. As an emerging growth company, we are exempt from certain financial disclosure and governance requirements for up to five years as defined in the Jumpstart Our Business Startups Act
(“the JOBS(the “JOBS Act”)
, that eases restrictions on the sale of securities; and increases the number of shareholders a company must have before becoming subject to the SEC’s reporting and disclosure rules. We shall continue to be deemed. For as long as we are an emerging growth company,
untilunlike public companies that are not emerging growth companies under the
earliest of: | | |
| (a)
| the last day of the fiscal year of the issuer during which it had total annual gross revenues of $1,000,000,000 (as such amount is indexed for inflation every five years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) or more;
|
| | |
| (b)
| the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective IPO registration statement;
|
| | |
| (c)
| the date on which such issuer has, during the previous three-year period, issued more than $1,000,000,000 in non-convertible debt; or
|
| | |
| (d)
| the date on which such issuer is deemedJOBS 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 a “large accelerated filer,” as defined in section 240.12b-2 of title 17, Code of Federal Regulations, or any successor thereto. |
As an emerging growth company we are exempt from Section 404(b) of Sarbanes Oxley. Section 404(a) requires issuers to publish information in their annual reports concerningupon the scope and adequacyearliest of:
●
the last day of the internal control structure and procedures for financial reporting. This statement shall also assess fiscal year in which we have $1.0 billion or more in annual revenues;
●
the effectivenessdate on which we become a “large accelerated filer” (the fiscal year-end on which the total market value of such internal controls and procedures. Section 404(b) requires that our common equity securities held by non-affiliates is $700 million or more as of our most recently completed second fiscal quarter);
●
the registered accounting firm shall, in date on which we issue more than $1.0 billion of non-convertible debt over a three-year period; or
●
the
same report, attest to and report on the assessment on the effectivenesslast day of the
internal control structure and procedures for financial reporting.Asfiscal year following the fifth anniversary of our initial public offering.
In addition, Section 107 of the JOBS Act provides that an emerging growth company
we are also exempt fromcan take advantage of the extended transition period provided in Section
14A (a) and (b)7(a)(2)(B) of the Securities
Exchange Act of
1934,1933, as amended (the
“Exchange“Securities Act”),
which requires the shareholder approval of executive compensation and golden parachutes.We have elected to use the extended transition period for complying with new or revised accounting standards, under Section 102(b)(2)but we intend to irrevocably opt out of the JOBS Act, which allows us to delay the adoption ofextended transition period and, as a result, we will adopt new or revised accounting standards that have different effectiveon the relevant dates in which adoption of such standards is required for other public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
Our principal executive offices are located at 45 Almeria Avenue, Coral Gables, FL 33134, and our telephone number is 305-430-6103. Our fiscal year end is September 30.
RISK FACTORS
An investment
Investing in our Common Stockcommon stock involves a significant degree of risk.risks. You should not invest in our Common Stock unless you can afford to lose your entire investment. You shouldcarefully consider carefully the following risk factors and other information in this prospectus, including the matters addressed under “Cautionary Statement Regarding Forward-Looking Statements,” and the following risks before decidingmaking an investment decision. The trading price of our common stock could decline and our ability to investpay 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
Common Stock.Risks Related to this Offering
WE ARE DEPENDENT UPON THE PROCEEDS FROM VARIOUS OFFERINGS TO PROVIDE FUNDS TO DEVELOP OUR BUSINESS. THERE ARE NO ASSURANCES WE WILL RAISE SUFFICIENT CAPITAL TO ENABLE US TO CONTINUE TO DEVELOP OUR BUSINESS.
5
While this offeringmining operations. We will give us capitalincur significant expenses in order to implement our immediate strategies webusiness 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 guarantee prospective investorsassure you that our proposed business plan will materialize or prove successful, or that we will ever generate any significant revenues or report profitable operations, or that our revenues will not decline in future periods. Until we begin making enough cash flow from our operations we are dependent upon the proceeds from various offeringsbe able to provide funds for the development of our business.operate profitably. If we cannot raise sufficient funds,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 6 months ending on June 30, 2018, our unaudited net loss from operations was $4,688,345. 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 have significantly less funds availablecontinue to usincur 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 strategy,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.
We have yet to achieve positive cash flow and, given our projected funding needs, our ability to generate any revenues may be adversely affected. positive cash flow is uncertain.
We do not have any firm commitments to provide capital and wehad unaudited negative cash flow from operating activities of $2,481,441 for the 6 months ending on June 30, 2018. We anticipate that we will continue to have certain difficulties raisingnegative 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 givenexpenditures 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 development stage offoreseeable future may adversely affect our company, and the lack of a public marketability to raise needed capital for our securities. Accordingly,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 cannot assure you thatwill achieve positive cash flow in the foreseeable future.
We may need access to additional working capital as needed willfinancing, which may not be available to us uponon acceptable terms acceptable to us. If we do not raise funds as needed, our ability to continue to implement our business modelor at all, and there is in jeopardy and we may never be able to achieve profitable operations. In that event,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 iscould 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
jeopardy and you could lose all of your investment intheir opinion that accompanies our
company.
WE HAVE ISSUED A PROMISSORY NOTE TO SOUTHRIDGE FOR $50,000 PLUS 7% INTEREST PER ANNUM THAT HAS TO BE PAID BACK DECEMBER 30, 2016. WE PLAN TO PAY THIS NOTE WITH THE FUNDS WE HAVE CURRENTLY AND FROM THE FUTURE CASH FLOW FROM OUT VARIOUS DIVISIONS. HOWEVER IF WE DO NOT RAISE ADEQUATE CAPITAL FROM THIS OFFERING THAT PAYMENT PLUS OUR OVERHEAD EXPENSES COULD MAKE IT DIFFICULT FOR US TO CONTINUE OUR OPERATIONS AS WE CURRENTLY OPERATE.
With reference to this offering we have issued to Southridge a $50,000 promissory note at 7% interest per annum to be paid back on December 30, 2016. We believe we can request an extension to pay back this note although we have no such agreementaudited consolidated financial statements as of now. We plan to pay this note withand for those years indicating that our current funds and from our future cash flows. However, we have to depend on the proceeds from this offering or any alternative funding—for which we have no agreements as of now—to continue with our operations. In the event we do not get enough capital from this offering we may have to cease operations since we will not have enough capital to carry on our operations as we conduct them now.
OUR MANAGEMENT HAS FULL DISCRETION AS TO THE USE OF PROCEEDS FROM THIS OFFERING.
We anticipate that the net proceeds from this offering will be used the purposes set forth under “Use of Proceeds” appearing elsewhere in this prospectus. We reserve the right, however, to use the net proceeds from this offering for other purposes not presently contemplated which we deem to be in our best interests in order to address changed circumstances and opportunities. As a result of the foregoing, investors in the shares of Common Stock offered hereby will be entrusting their funds to our management, upon whose judgment and discretion the investors must depend.
THERE MAY BE NOT ENOUGH LIQUIDITY TO SELL THESE SHARES IN THE PUBLIC MARKET.
We began trading our stock under the stock symbol NGFF on November 25, 2015 in OTCPINK market and currently we are listed on OTCQB. Since we began trading, to the date of filing this prospectus, we had a total volume of 2,750 shares which is not adequate to sell any significant number of shares if you wish to sell a significant number of your shares that you may buy through this offering due to that lack of liquidity in our stock in the market. There is no assurance that a more liquid market for our shares would ever develop and if so you may stand to lose your total investment you make buying our stock.
SOUTHRIDGE WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE FOR OUR COMMON STOCK.
The common stock to be issued to Southridge pursuant to the Equity Purchase Agreement will be purchased at a 90% discount to the lowest closing “best bid” price (the closing bid price as reported by Bloomberg LP) of the common stock for any single trading day during the ten consecutive trading days immediately following the date of our notice to Southridge of our election to put shares pursuant to the Equity Purchase Agreement. Southridge has a financial incentive to sell our common stock immediately upon receiving the shares to realize the profit equal to the difference between the discounted price and the market price. If Southridge sells the shares, the price of our common stock could decrease. If our stock price decreases, Southridge may have a further incentive to sell the shares of our common stock that it holds. These sales may have a further impact on our stock price.
Risks Related to Our Business
WE HAVE ELECTED THE OPT-IN RIGHT FOR EMERGING GROWTH COMPANIES THAT ALLOWS FOR EXEMPTIONS FROM CERTAIN REPORTING STANDARDS AND AS A RESULT, OUR FINANCIAL STATEMENTS MAY NOT BE COMPARABLE WITH OTHER COMPANIES IN OUR INDUSTRY THAT COMPLY WITH SUCH STANDARDS.
We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, which allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that currently comply with the new standards.
6
WE HAVE A LIMITED OPERATING HISTORY THAT YOU CAN USE TO EVALUATE US, AND THE LIKELIHOOD OF OUR SUCCESS MUST BE CONSIDERED IN LIGHT OF THE PROBLEMS, EXPENSES, DIFFICULTIES, COMPLICATIONS AND DELAYS FREQUENTLY ENCOUNTERED BY A SMALL DEVELOPING COMPANY.
We were incorporated in the State of Florida in October 2013. We currently have no significant assets or financial resources. The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered by a small developing company starting a new business enterprise and the highly competitive environment in which we will operate. Since we have a limited operating history, we cannot assure you that our business will be profitable or that we will ever generate sufficient revenues to meet our expenses and support our anticipated activities.
WE ARE A HOLDING COMPANY THAT OPERATES BUSINESSES THROUGH OPERATING SUBSIDIARIES. IF WE WERE DEEMED TO BE AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940, WE WOULD BE REQUIRED TO RESTRUCTURE OUR OPERATIONS, OR TO REGISTER AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940 AND BECOME SUBJECT TO PROVISIONS OF THE INVESTMENT COMPANY ACT OF 1940, WHICH LIKELY WOULD HAVE A MATERIAL ADVERSE IMPACT ON THE BUSINESS ACTIVITIES OF THE COMPANY.
We are a holding company planning to operate our business through various subsidiaries with our management actively managing the subsidiaries and thus not a passive investment company. Although we do not believe we will be required to register as an investment company under the Investment Company Act of 1940, it if is determined that we are an investment company then that would have a material adverse impact on the business activities of the Company. A company is required to register as an investment company under the Investment Company Act of 1940, if, among other things, and subject to various exceptions:
·
it is or holds itself out to be engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or
·
it is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 per centum of the value of such issuer’s total assets (exclusive of Government securities and cash items) on an unconsolidated basis.
THE LIKELIHOOD OF OUR ABILITY TO OPERATE MUST BE CONSIDERED IN LIGHT OF THE PROBLEMS, EXPENSES, DIFFICULTIES, COMPLICATIONS AND DELAYS THAT WE ENCOUNTER, SUCH AS OUR LACK OF BUSINESS AND LACK OF CAPITAL.
We were incorporated in Florida in October 2013. Our lack of business and lack of capital materially threaten our ability to operate. The likelihood ofposition raises substantial doubt about our ability to continue as a going concern. If we are unable to operate must be considered in light of the problems, expenses, difficulties, complications and delays thatimprove our liquidity position, we encounter, such as our lack of capital. Being a public company may provide us with the ability to raise money and finance our operations until and if our revenues increase but also being a public company increases our expenses due to the cost of maintaining a public company.
OUR ENERGY AND RETAIL DIVISION REQUIRE GOVERNMENT REGULATORY APPROVALS AND WILL HAVE TO ABIDE BY ENVIRONMENT REGULATIONS ENFORCED BY THE ENVIRONMENTAL PROTECTION AGENCY IN OPERATING OUR VEHICLE CONVERSION DIVISION, AND WE MAY FIND IT TOO COSTLY OR UNABLE TO GET SUCH CLEARANCE TO SUCCESSFULLY CONDUCT BUSINESS.
Our business plan anticipates that in the future, Company operating a division focused on converting vehicles that currently run on gasoline and diesel to run on NG. In the United States, the Environmental Protection Agency (“EPA”) has complex regulations that we have to abide by in order to conduct the vehicle conversion business. We may find these regulations to be prohibitively costly, possibly requiring us to charge our potential customers higher fees in order to be competitive and profitable. In the event that the EPA regulations are too costly or we do not receive EPA clearance to operate our planned vehicle conversion business, we will not be able to effectively carry out our business plan and our results of operations will be adversely affected.
THE SUCCESS OF OUR BUSINESS MODEL IS DEPENDENT UPON OUR ABILITY TO IDENTIFY LOCATIONS THAT WILL GENERATE SUBSTANTIAL NG VEHICLE TRAFFIC IN ORDER TO BUILD AND OPERATE NG SERVICE STATIONS PROFITABLY, EITHER DIRECTLY BY US OR THROUGH FRANCHISEES.
7
A significant piece of the Company’s business plan is to build and operate NG refueling and service stations to generate revenue. As vehicles in the United Statescontinue as a going concern. The accompanying consolidated financial statements do not include any adjustments that run on NG are limited, a significant market for our services may not develop as we anticipate. In the event that the NG automobile market does not develop in the United States ormight result if we are not ableunable to identify suitable locations for our NG refuelingcontinue as a going concern and, service stations, we will not be able to effectively carry out our business plan and our results of operations will be adversely affected.
OUR HEALTH CARE SUBSIDIARY ECI LATAM INC. HAS ONLY ONE MAJOR CLIENT AND HAS LIMITED OPERATING HISTORY WHICH MAKES IT HARDER TO PROJECT THE FUTURE OF OUR SUBSIDIARY.
We acquired ECI Latam Inc. (ECIL) in February of 2015. ECIL has been in business only since March 2014 and has a limited operating history. Also so far ECIL has had only one major client and ECIL only maintain medical equipment machinery being manufactured by Getinge Group, a major Swedish medical equipment manufacturer. These limitations make it difficult to project the future of our single operating subsidiary in our Healthcare Division.
WE MAY NEED ADDITIONAL FINANCING WHICH WE MAY NOT BE ABLE TO OBTAIN ON ACCEPTABLE TERMS. ADDITIONAL CAPITAL RAISING EFFORTS IN FUTURE PERIODS MAY BE DILUTIVE TO OUR THEN CURRENT SHAREHOLDERS OR RESULT IN INCREASED INTEREST EXPENSE IN FUTURE PERIODS.
We maytherefore, be required to raiserealize 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 working capital in orderfinancing will be available to fully implement our business model. Our future capital requirements, however, dependus on favorable terms when required, or at all, particularly given that we do not now have a number of factors, including our operations, our ability to grow revenues from other sources, our ability to manage the growth of our business and our ability to control our expenses.committed credit facility with any government or financial institution. If we raisecannot obtain additional capital through the issuance of debt, this will result in increased interest expense. Iffinancing when we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our company held by existing shareholders will be reducedneed it and those shareholders may experience significant dilution. In addition, new securities may contain certain rights, preferences or privileges that are senior to those of the shares of Common Stock. We cannot assure that we will be able to raise the working capital as needed in the future on terms acceptable to us, if at all. If we do not raise funds as needed, we will be unable to fully implement our business, model, fund our ongoing operations or grow our company.
OUR MANAGEMENT MAY BE UNABLE TO IDENTIFY LOCATIONS TO BUILD A FUELING AND SERVICE STATION AND/OR EFFECTIVELY INTEGRATE OUR MANAGEMENT STYLE TO OUR FRANCHISEES AND THUSWE MAYBE UNABLE TO FULLY REALIZE THE ANTICIPATED BENEFITS OF SETTING UP FRANCHISES WHICH MAY AFFECT OUR GROWTH.
We are subject to various risks associated with our growth strategy, including the risk that we will be unable to identify suitable locations and franchise partners. Any future expansion plans will be subject to a number of challenges, including:
| | |
| ·
| the diversion of management time and resources and the potential disruption of our ongoing business;
|
| | |
| ·
| difficulties in maintaining uniform standards, controls, procedures and policies;
|
| | |
| ·
| unexpected costs and time associated with upgrading both the internal accounting systems as well as educating each of their staffs as to the proper collection and recordation of financial data;
|
| | |
| ·
| potential unknown liabilities associated with franchising operations the difficulty of retaining key alliances on attractive terms with partners and suppliers; and
|
| | |
| ·
| the difficulty of retaining and recruiting key personnel and maintaining employee morale.
|
WE MAY ACQUIRE NG STATIONS ALREADY IN OPERATION IN EXCHANGE FOR STOCK OF OUR COMPANY, AND SUCH ACQUISITION EFFORTS IN FUTURE PERIODS MAY BE DILUTIVE TO OUR THEN CURRENT SHAREHOLDERS.
Our business model may result in the issuance of our securities to consummate certain acquisitions in the future. As a result, the percentage ownership of our company held by existing shareholders will be reduced and those shareholders may experience significant dilution. In addition, new securities may contain certain rights, preferences or privileges that are senior to those of our Common Stock. As our affiliates control a majority of the Company’s voting securities, we will generally not need to solicit our shareholders’ consent before entering into acquisition transactions. Our shareholders are dependent upon the judgment of our management in determining the number and characteristics of any securities issued as consideration in a potential acquisition.
8
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL AND THE LOSS OF THESE KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our success is, to a certain extent, attributable to the management, sales and marketing and operational expertise of key personnel who will perform key functions in the operation of our business. The loss of one or more of these key employees could have a material adverse effect upon our business,prospects, financial condition, operating results and our results of operationsability to continue as a going concern could be adversely impacted.
IF THE PRICES OF CNG AND LNG DO NOT REMAIN SUFFICIENTLY BELOW THE PRICES OF GASOLINE AND DIESEL, POTENTIAL CUSTOMERS WILL HAVE LESS INCENTIVE TO PURCHASE NG VEHICLES, WHICH WOULD DECREASE DEMAND FOR CNG AND LNG AND REDUCE OUR POTENTIAL GROWTH.
NG vehicles cost more than comparable gasoline or diesel powered vehicles because of the components needed for a vehicle to use NG add to a vehicle’s base cost. If the prices of CNG and LNGaffected.
We do not
remain sufficiently below the prices of gasoline or diesel, operators may be unable to recover the additional costs of acquiring or converting to NG vehicles in a timely manner, and they may choose not to use NG vehicles.have any existing bank credit facilities. Our ability to
offer CNGobtain such financing may be limited and
LNG fuelif we are unable to
secure such financing, our
customers at lower prices than gasoline and diesel depends in part on NG prices remaining lower, on an energy equivalent basis, than oil prices. If the price of oil, gasoline and diesel declines, it will make it more difficult for us to offer our customers discounted prices for CNG and LNG and maintain an acceptable margin on our sales. Recent and significant volatility in oil and gasoline prices demonstrate that it is difficult to predict future transportation fuel costs. In addition, any new regulations imposed on NG extraction, particularly on extraction of NG from shale formations, could increase the costs of gas production or make it more costly to produce NG, which could lead to substantial increases in the price of NG. Reduced prices for gasoline and diesel fuel may cause potential customers to delay or reject converting their fleets to run on NG. In that event, sales of NG fuel and vehicles would be slowed and our results of operations could be adversely impacted.THE VOLATILITY OF NG PRICES COULD ADVERSELY IMPACT THE ADOPTION OF CNG AND LNG VEHICLE FUEL AND OUR BUSINESS.
In the recent past, the price of NG has been volatile, and this volatility may continue. Increased NG prices affect the cost to us of NG and will adversely impact our projected operating margins in cases where we have committed to sell NG at a fixed price without an effective futures contract in place that fully mitigates the price risk or where we otherwise cannot pass the increased costs on to our customers. In addition, higher NG prices may cause CNG and LNG to cost as much as or more than gasoline and diesel generally, which would adversely impact the adoption of CNG and LNG as a vehicle fuel and consequently our business.
OUR GROWTH IS INFLUENCED BY GOVERNMENT INCENTIVES AND MANDATES FOR CLEAN BURNING FUELS AND ALTERNATIVE FUEL VEHICLES. THE FAILURE TO PASS NEW LEGISLATION WITH INCENTIVE PROGRAMS MAY ADVERSELY AFFECT OUR BUSINESS.
The NG business is influenced by federal, state and local government tax credits, rebates, grants and similar incentives that promote the use of NG and renewable natural gas (RNG) as a vehicle fuel, as well as bylaws, rules and regulations that require reductions in carbon emissions. The absence of these programs and incentives could have a detrimental effect on the NG vehicle and fueling industry, and as a result our projected revenue and related financial performanceprofitability may be adversely affected.
OUR GROWTH DEPENDS IN PART ON ENVIRONMENTAL REGULATIONS AND PROGRAMS MANDATING THE USE OF CLEANER BURNING FUELS, AND MODIFICATION OR REPEAL OF THESE REGULATIONS MAY ADVERSELY IMPACT OUR BUSINESS.
We do not have any existing bank credit facilities. Our
business depends in part on environmental regulationsability to obtain such financing may be limited as banks and
programs that promote or mandate the use of cleaner burning fuels, including NG and RNG for vehicles. Industry participants with a vested interest in gasoline and diesel, many of which have substantially greater resources than we do, invest significant time and money inother financial institutions may be reluctant to extend credit to businesses they perceive as lacking prolonged operating histories, an
effort to influence environmental regulations in ways that delay or repeal requirements for cleaner vehicle emissions. Further, economic difficulties may result in the delay, amendment or waiver of environmental regulations due to the perception that they impose increased costs on the transportation industry that
cannotmay be
absorbed in a challenging economy. The delay, repeal or modificationpolitically undesirable, and limited information relating to revenues and costs upon which they can evaluate the merits and risks of
federal or state regulations or programs that encourage the useany such credit extension. Our inability to secure bank credit facilities (or some other form of
cleaner vehicles could also have a detrimental effect on NG vehicle industry, which, in turn, could slow our growth and adversely affect our business.WE FACE INCREASING COMPETITION FROM OIL AND GAS COMPANIES, FUEL PROVIDERS, REFUSE COMPANIES, INDUSTRIAL GAS COMPANIES, NG UTILITIES AND OTHER ORGANIZATIONS THAT HAVE FAR GREATER RESOURCES AND BRAND AWARENESS THAN US.
9
A significant number of established businesses, including oil and gas companies, refuse collectors, NG utilities and their affiliates, industrial gas companies, station owners, fuel providers and other organizations have entered or are planning to enter the NG fuels market. Many of these current and potential competitors have substantially greater financial, marketing, research and other resources than we have. If we are not able to successfully compete with these entities our business, financial condition and our results of operations will be materially adversely affected.
IF THERE ARE ADVANCES IN OTHER ALTERNATIVE VEHICLE FUELS OR TECHNOLOGIES, OR IF THERE ARE IMPROVEMENTS IN GASOLINE, DIESEL OR HYBRID ENGINES, DEMAND FOR NG VEHICLES MAY DECLINE AND OUR BUSINESS MAY SUFFER.
Technological advances in the production, delivery and use of alternative fuels that are, or are perceived to be, cleaner, more cost-effective or more readily available than CNG, LNG or RNG, have the potential to slow adoption of NG vehicles. Advances in gasoline and diesel engine technology, especially hybrids,cash/liquid injection) may offer a cleaner, more cost-effective option and make fleet customers less likely to convert their fleets to NG. Technological advances related to ethanol or biodiesel, which are increasingly used as an additive to, or substitute for, gasoline and diesel fuel, may slow the need to diversify fuels and affect the growth of the NG vehicle market. Use of electric heavy duty trucks or the perception that electric heavy duty trucks may soon be widely available and provide satisfactory performance in heavy duty applications may reduce demand for heavy duty LNG trucks. In addition, hydrogen and other alternative fuels in experimental or developmental stages may eventually offer a cleaner, more cost-effective alternative to gasoline and diesel than NG. Advances in technology that slow the growth of or conversion to NG vehicles, or which otherwise reduce demand for NG as a vehicle fuel, will have an adverse effect on our business. Failureresults of NG vehicle technologyoperations. Due to advance at a sufficient pace may also limit its adoptionour limited operating history and our ability to compete with other businesses providing alternative fuelslimited assets, and alternative fuel vehicles.
OUR ABILITY TO OBTAIN LNG IS CONSTRAINED BY FRAGMENTED AND LIMITED PRODUCTION AND INCREASING COMPETITION FOR LNG SUPPLY. IF WE ARE REQUIRED TO SUPPLY LNG FROM DISTANT LOCATIONS AND CANNOT PASS THESE COSTS THROUGH TO OUR CUSTOMERS, OUR PROJECTED OPERATING MARGINS WILL DECREASE ON THOSE SALES DUE TO OUR INCREASED TRANSPORTATION COSTS.
Productionthe lag often existing between commencing business operations and profitability, in the absence of LNG is fragmented and limited. It may be difficult for us to obtain LNG without interruption and near our projected markets at competitive prices or at all. If we are unable to purchase enough of LNG to meet customer demand,such bank financing, we may be liableforced to rely solely on revenues generated from our potential customers for penaltiesbusiness operations in order to support our company, which revenues may not be sufficient to meet our operating and lose customers. Competition for LNG supply is escalating.administrative expenses. If we experience a LNG supply interruptiondo not have sufficient cash to meet our expenses, whether from revenues or LNG demand exceeds available supply,bank credit, we may have to curtail or if we have difficulty entering or maintaining relationships with contract carriers to deliver LNG on our behalf, our ability to expand future LNG sales to new customers will be limited, our relationships with potential customers may be disrupted and our results of operations may be adversely affected. Furthermore, because transportation of LNG is relatively expensive, if we are required to supply LNG from distant locations and cannot pass these costs through to our customers, our projected operating margins will decrease on those sales due to our increased transportation costs.
APPROXIMATELY 14% OF COMPANY’S TOTAL ASSETS ARE IN PUBLICLY TRADED STOCKS AND ANY SUDDEN MARKET DOWNTURN THAT WOULD LAST A LONG TIME MAY MAKE IT HARDER FOR US TO LIQUIDATE SOME OR ALL OF OUR MARKETABLE SECURITIES CAUSING US SEVERE LOSSES FROM THE SALE OF SUCH STOCKS CAUSING US EVEN FURTHER FINANCIAL HARDSHIP AND EVEN TERMINATE OUR OPERATIONS, UNLESS WE RAISE ANY MONEY FROM THIS OFFERING TO WEATHER SUCH AN EVENTUALITY.
We have brokerage accounts with Interactive Brokers LLC to invest a portion of our excess cash in dividend paying stocks while hedging them with options. I. Andrew Weeraratne, the Company’s Chief Executive Officer, manages the account. As of March 31, 2016, amount invested in stock was about 14%cease business operations.
Holders of the value ofSeries A Preferred Stock will control the Company’s total assets. Any sudden market crash that would be prolonged would cause us to liquidate those securities at whatever the market price at the time to maintain adequate cash to carry on with our operations unless we raise adequate funds to cover our current expenses. As of March 31,2016 the consolidated financial statements of the Company shows total marketable securitiesfor the foreseeable future.
The holders of the Series A Preferred Stock can convert their shares to common stock of the Company
on a basis of one share of Series A Preferred Stock to
be $242,8013 and
that is due to1/3 shares of common stock and are the
amountbeneficiary of
stocks that NGFC Limited Partnership (“NGLP”) holds in its account. NGFC ownership of NGLP as of March 31, 2016, as its general partner, amounts to 2.73% with the remainder of NGLP being owned by limited partners that is subtracted as minority ownership in the financial statements and as such we have not added that amount to the above 14% figure. Also with NGLP no longer represented in the consolidated financial statements of NGFC after May 20, 2016 the future consolidated financial statements will not reflect the stock ownership of NGLP in the consolidated financial statementscertain enhanced anti-dilution protection. Furthermore, holders of the
Company.Risks RelatedSeries A Preferred Stock will vote on Company matters on an “as-converted” basis of one vote of Series A Preferred Stock to Our Common Stock
OUR MAJORITY STOCKHOLDER OWNS 4,000,000 SHARES OF OUR CLASS A COMMON STOCK AND 7,000,000 SHARES OF OUR CLASS B COMMON STOCK. BECAUSE OF THE VOTING PREFERENCE GRANTED TO HOLDERS OF SERIES B COMMON STOCK, THE MAJORITY SHAREHOLDER CURRENTLY HOLDS VOTING RIGHTS EQUAL TO HOLDING 74,000,000 SHARES OF CLASS A COMMON STOCK, WHICH REPRESENTS APPROXIMATELY 84% OF THE CURRENT
10
OUTSTANDING VOTING STOCK OF THE COMPANY. THE MAJORITY SHAREHOLDER’S INTERESTS MAY DIFFER FROM YOURS AND HE WILL BE ABLE TO EXERT SIGNIFICANT INFLUENCE OVER OUR CORPORATE DECISIONS, INCLUDING A CHANGE OF CONTROL.
As33 and 1/3 votes of filing date of this prospectus, Mr. I. Andrew Weeraratne, our Chief Executive Officer, held 4,000,000 shares of Common Stock and 7,000,000 shares of Class B common stock, which gives him voting rights equal to 84% shares of Common Stock because of the 10:1 voting preference granted to the series of Class B common stock. Assuming a full subscription of this offering for 7,500,000 shares of Common Stock, Mr. Weeraratne will control approximately 77 % of the Company’s outstanding voting stock. As a result heof this Series A Preferred stock ownership, the holders of the Series A Preferred Stock will be ablecontinue to influence or controlthe vote on all matters requiring approval bysubmitted to a vote of our stockholders,shareholders, including the election of directors, amendments to the certificate of incorporation and the by-laws, and the approval of mergers, acquisitionssignificant corporate transactions.
We have never declared or other extraordinary transactions. Mr. Weeraratne may have interests that differpaid a cash dividend on our common shares nor will we in the foreseeable future.
You will not receive dividend income from yoursan investment in the shares and may vote inas a way withresult, 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, receives an 8.0% annual dividend, of which you disagreean accrued amount is recorded of $87,157, as of June 30, 2018, and that may be adversewill continue to your interests. This concentrationaccrue to the Series B preferred stock holder.
With the exception of
ownership may have the
effect of delaying, preventing or deterring a change of controlSeries B preferred stock dividend referenced above, we currently intend to retain future earnings, if any, to finance the operation and expansion of our
company, could deprive our stockholdersbusiness. Accordingly, investors who anticipate the need for immediate income from their investments by way of
an opportunity to receive a premium for their stock as part of a salecash dividends should refrain from purchasing any of our
companysecurities. As we do not intend to declare dividends in the future, you may never see a return on your investment and
you indeed may
affect the potential market price of our stock. Conversely, this concentration may facilitate a change in control at a time when you and other investors may prefer not to sell.OUR ARTICLES OF INCORPORATION PROVIDE SUPER VOTING RIGHTS AND OTHER PRIVILEGES TO OUR CLASS B SHAREHOLDERS INCLUDING A STIPULATION THAT CERTAIN ACTIONS BY THE COMPANY WON’T BE PERMITTED WITHOUT THE PRIOR WRITTEN CONSENT OF THE HOLDERS OF AT LEAST A MAJORITY OF THE VOTING POWER OF THE THEN OUTSTANDING CLASS B COMMON STOCK, PROVIDING CLASS B COMMON STOCK SHAREHOLDERS WITH SIGNIFICANT INFLUENCE OVER THE COMPANY’S OPERATIONS, WHICH MAY BE DETRIMENTAL TO THE OTHER SHAREHOLDERS AND POTENTIAL INVESTORS.
The Company’s Articles of Incorporation provide that so long as any shares of Class Blose your entire investment.
Our common stock
are outstanding, the Company may not take any of the following actions without the prior written consent of the holders of at leastis considered a
majority of the voting power of the then outstanding Class B common stock: | | |
| ·
| sell, convey or otherwise dispose of or encumber all or substantially all of our assets, or merger with or consolidate with another corporation, other than our wholly-owned subsidiary, or effect any transaction or series of transactions in which more than 50% of the voting power of our company is transferred or disposed of;
|
| | |
| ·
| alter or change any of the rights of the Class B common stock or increase or decrease the number of shares authorized;
|
| | |
| ·
| authorize or obligate our company to authorize any other equity security or security which is convertible or exercisable into an equity security of our company which has rights, preferences or privileges which are superior to, on a parity with or similar to the Class B common stock;
|
| | |
| ·
| redeem or repurchase any of our securities;
|
| | |
| ·
| amend our articles of incorporation; or
|
| | |
| ·
| change the authorized number of our board of directors.
|
This stipulation may discourage certain major investors from investing in our company and thus may have a negative effectpenny stock, which is subject to restrictions on our results of operations.
THE OFFERING PRICE OF THE SHARES OF COMMON STOCK WAS BASED ON THE LAST PRICE IT WAS SOLD ON THE OTCPINK, WHERE THERE IS NO LIQUIDITY FOR OUR SHARES AND THEREFORE SHOULD NOT BE USED AS AN INDICATOR OF THE FUTURE MARKET PRICE OF THE COMMON STOCK. THEREFORE, THE OFFERING PRICE BEARS NO RELATIONSHIP TO THE ACTUAL VALUE OF THE COMPANY, AND MAY MAKE OUR SHARES DIFFICULT TO SELL.
The offering price for the shares of Common Stock was based on the last price our stock was sold on December 1, 2015. So far we have sold only 2,750 shares through thus the offering price is not an indication of and is not based upon the actual value of the Company. The offering price bears no relationship to the book value, assets or earnings of the Company or any other recognized criteria of value. The offering price should not be regarded as an indicator of a future market price of the Common Stock.
IF WE FAIL TO ESTABLISH AND MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROL, WE MAY NOT BE ABLE TO REPORT OUR FINANCIAL RESULTS ACCURATELY OR TO PREVENT FRAUD. ANY INABILITY TO REPORT AND FILE OUR FINANCIAL RESULTS ACCURATELY AND TIMELY COULD HARM OUR REPUTATION AND ADVERSELY IMPACT THE TRADING PRICE OF OUR COMMON STOCK.
11
Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, wemarketability, so you may not be able to manage our business as effectively as we would if an effective control environment existed,sell your shares.
Our common stock is subject to the penny stock rules adopted by the Securities and
our business and reputation with investorsExchange Commission that require brokers to provide extensive disclosure to their customers prior to executing trades in penny stocks. These disclosure requirements may
be harmed. Ascause a
result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operation and access to capital. We have not performed an in-depth analysis to determine ifreduction in the
past un-discovered failurestrading activity of
internal controls exist, and may in the future discover areas of our internal control that need improvement.A DTC “CHILL” ON THE ELECTRONIC CLEARING OF TRADES IN OUR SECURITIES IN THE FUTURE MAY AFFECT THE LIQUIDITY OF OUR STOCK AND OUR ABILITY TO RAISE CAPITAL.
Because our common stock, is considered a “penny stock,” there is a risk that the Depository Trust Company (“DTC”) may place a “chill” on the electronic clearing of tradeswhich in our securities. This may lead some brokerage firms to be unwilling to accept certificates and/or electronic deposits of our stock and other securities and also some may not accept trades in our securities altogether. A future DTC chillall likelihood would affect the liquidity of our securities and make it difficult for our shareholders to purchase or sell ourtheir securities.
Penny stocks generally are equity securities
in the open market. It may also have an adverse effect on our ability to raise capital because investors may be unable to easily resell our securities into the market. Our inability to raise capital on terms acceptable to us, if at all, could havewith a
material and adverse effect on our business and operations.OUR COMMON STOCK IS A “PENNY STOCK.” TRADING OF OUR COMMON STOCK MAY BE RESTRICTED BY THE SEC’S PENNY STOCK REGULATIONS, WHICH MAY LIMIT A STOCKHOLDER’S ABILITY TO BUY AND SELL OUR COMMON STOCK.
Our stock is a penny stock. The “SEC” has adopted Rule 15g-9, which generally defines “penny stock” to be any equity security that has a market price (as defined in Rule 15g-9) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to(other than securities registered on certain exceptions. Ournational securities are covered byexchanges or quoted on the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000(excluding the value of a primary residence) or annual income exceeding $200,000 or $300,000 jointly with their spouse. The pennyNASDAQ system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, whichthat provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must also make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for the stocka security that isbecomes subject to thesethe penny stock rules. Consequently, these penny stock rulesThe additional burdens imposed upon broker-dealers by such requirements may affectdiscourage broker-dealers from effecting transactions in our securities, which could severely limit their market price and liquidity of our securities. These requirements may restrict the ability of broker-dealers to tradesell our common stock and may affect your ability to resell our common stock.
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.
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;
●
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.
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.
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:
●
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:
●
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.
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;
●
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.
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 penny stock rules discourage investor interestcost 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 limit the marketabilityability 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
Common Stock.WE DO NOT EXPECT TO PAY DIVIDENDS FOR SOME TIME, WHICH COULD RESULT IN NO RETURN ON YOUR INVESTMENT.
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.
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 never declaredentered 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 paidenter 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.
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 stock. 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.
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.
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, intenddemand 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 earnings, if any,business plan, and we may find it difficult to provide funds forprocure mining equipment at a suitable cost, in particular deep mining equipment. To the operationextent we are unable to procure suitable mining equipment in line with our projected cost profile, our projected results may not be realized, and expansionour results of operations may be negatively affected.
We are a holding company and we depend on the ability of our businesssubsidiaries to distribute funds to us in order to satisfy our financial obligations and therefore, do not anticipate declaringto 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 paying cash dividends inother action by a third party, including a creditor, or by the foreseeable future. Anylaw of their respective jurisdictions of formation which regulates the payment of future dividends will be at the discretion of the Company’sdividends. 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 earnings,future financial condition,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.
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 levelfor self-bonding in light of indebtedness, contractual restrictionschanges 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 $25.4 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.
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.
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 relevant factorsspecialty 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 March 8, 2018, President Trump signed proclamations imposing a 25% tariff on imports of steel mill products and a 10% tariff on imports of wrought and unwrought aluminum. It is too early to know the impact these tariffs will have on demand for our metallurgical coal. Our export customers include foreign steel producers who may be affected by the tariffs to the extent their production is imported into the U.S. Conversely, demand for metallurgical coal from our domestic customers may increase. Retaliatory threats by foreign nations to these tariffs may limit international trade and adversely impact global economic conditions.
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
operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Various statementscoal 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 this prospectus contain or may contain forward-looking statements thatelectricity 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 knownpending and unknown risks, uncertaintiesproposed 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. 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
factorsindustrial uses, which
may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived from utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements.These statements are only predictions and involve known and
12
unknown risks, uncertainties and other factors, including those discussed under “Risk Factors,” which could cause our actual results to differ from those projected in any forward-looking statements we make.
Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk describedis 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;
●
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.
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 forward-lookingpollutants 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. This rule was recently stayed nationwide by the U.S. Court of Appeals for the Sixth Circuit pending the outcome of litigation concerning the rule. We anticipate that these new EPA and Corps rules, if retained after 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.
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 made herein. Readerscostly 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 cautionedsubject 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.
A federal database, known as the Applicant Violator System (“AVS”), is maintained for this purpose. Certain relationships are presumed to place undue reliance on these forward-looking statements and readers should carefully review this prospectus in its entirety,constitute ownership or control, including the risks describedfollowing: 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 “Risk Factors.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,” Exceptas 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 ongoingproducts.
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 disclosereview 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 informationadverse 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.
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 requires California’s state pension funds to divest investments in companies that generate 50% or more of their revenue from coal mining by 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, at least ten major banks enacted such policies in 2015. 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.
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 securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to reportCoal Mine Health and Safety Act of 1969 and the occurrenceMine Act, as amended. We perform periodic evaluations of unanticipated events. These forward-looking statements speak only asour 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 dateMine Act by reenacting two provisions, which had been eliminated in 1981. Under the amendments, a miner with at least fifteen years of this prospectus,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 you should not relyrelated 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 will become effective in January 2017. The rule will impact both surface and underground mining operations, as it will impose stricter guidelines on these statements withoutconducting coal mining operations within buffer zones and will increase testing and monitoring requirements related to the quality or quantity of surface water and groundwater or the biological condition of streams. The Stream Protection Rule will also consideringrequire the riskscollection of increased pre-mining data about the site of the proposed mining operation and uncertaintiesadjacent 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. If the final rule survives judicial review or further legislative action and takes effect, our mining operations could face significant operating restrictions, as well as increased monitoring and restoration costs.
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 statementsaccruals 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
business.
USE OF PROCEEDS
current profitability is not guaranteed, and we may incur significant losses in the future.
We will not receive any proceeds from the sale of common stock offered by Southridge. However, we will receive proceedshave generated limited revenues from the sale of our common stockproducts, and our business may fail if we are not able to Southridge pursuantmine 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 Equity Purchase Agreement. The proceeds fromcapital required to reach profitability.
Maintaining and expanding our exerciseexisting business is capital intensive. Specifically, the ongoing expenses of coal mining and processing, the Put Right pursuantrequired 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 the Equity Purchase Agreementmaintain 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 used for general administrative expense,able to purchase any businessesmaintain our existing or future levels of business or generate sufficient cash flow, or that we believe would provide us positive cash flowwill have access to coversufficient financing to continue our minimum annual cash outflow needsproduction, 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 for accountingour 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
audit fees.
DETERMINATION OF OFFERING PRICE
The price at which Southridge (“the Investor”) would buy our shares is established by the market price on the date the purchase price is calculated. Market price shall mean the lowest Closing Price on the Principal Market for any Trading Day during the Valuation Period, as reported by Bloomberg Finance L.P. The purchase pricefailure to Southridge would be 90% of the Market Price on such date on which the Purchase Price is calculated. The Company has to deliver to Southridge a request for Southridge to buy a certain number of shares through the delivery of a put notice substantially in the form of Exhibit A filed as part of Equity Purchase Agreement filed with the SEC with on March 28, 2016. Such shares Southridge would buy through that put notice are called put shares.
Once a put notice is produced Southridge is obligated to buy the shares after the Valuation Period, which is the period of ten (10) Trading Days immediately following the Clearing Date associated with the applicable put notice during which the Purchase Price of the Common Stock is valued. However an event that is defined a Valuation Event occurs during any Valuation Period a new Valuation Period shall begin on the Trading Day immediately after the occurrence of such Valuation Event and end on the tenth (10th) Trading Day thereafter. Investor shall notify the Company in writing of the occurrence of the Clearing Date associated with a put notice. The Valuation Period shall begin the first Trading Day following such written notice from Investor.
"VALUATION EVENT" shall mean an event in which the Company at any time during a Valuation Period takes any of the following actions:
(a)
subdivides or combines the Common Stock;
(b)
pays a dividend in shares of Common Stock or makes any other distribution of shares of Common Stock, except for dividends paid with respect to any series of preferred stock authorized by the Company, whether existing now or in the future;
(c)
issues any options or other rights to subscribe for or purchase shares of Common Stock other than pursuant to this Agreement, and other than options or stock grants issued or issuable to directors, officers and employees pursuant to a stock option program, whereby the price per share for which shares of Common Stock may at any time thereafter be issuable pursuant to such options or other rights shall be less than the Closing Price in effect immediately prior to such issuance;
(d)
issues any securities convertible into or exchangeable for shares of Common Stock and the consideration per share for which shares of Common Stock may at any time thereafter be issuable pursuantadhere to the terms of agreements, such convertible or exchangeable securities shall be less than the Closing Priceas mineral lease agreements, may result in effect immediately prior tosignificant business impairment.
All of our coal deposits and surface rights are leased from mineral and surface owners, such
issuance;
(e)
issues shares of Common Stock otherwise than as providedElk 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 foregoing subsections (a) through (d), at a price per share less, or forfuture). 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 consideration lower, than the Closing Price in effect immediately priorperformance metrics. Failure to such issuance, or without consideration; or
(f)
makes a distribution of its assets or evidences of indebtednessadhere to the holders of Common Stock as a dividendlease agreements may result in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or
13
substantially all of the Company's assets (other than under the circumstances provided for in the foregoing subsections (a) through (e).
Also the price at which Southridge will buy our shares will be dependent on a floor price which is defined as follows: In the event that, during a Valuation Period, the Closing Price on any Trading Day is less than seventy five percent (75%) of the average of the closing bid prices for the ten (10) trading days immediately preceding the date of the Company’s Put Notice (a “Low Bid Price”), for each such Trading Day, the parties shall have no right to sell and shall be under no obligation to purchase one tenth (1/10th) of the Investment Amount specified in the Put Notice, and the Investment Amount shall accordingly be deemed reduced by such amount, in the event that during a Valuation Period there exists a Low Bid Price for any three (3) Trading Days—not necessarily consecutive—then the balance of each party’s right and obligation to sell and purchase the Investment Amount under such Put Notice shall terminate on such third Trading Day (“Termination Day”), and the Investment Amount shall be adjusted to include only one-tenth (1/10th) of the initial Investment Amount for each Trading Day during the Valuation Period prior to the Termination Day that the Bid Price equals or exceeds the Low Bid Price.
For example if NGFC makes its first put statement requesting $800,000 when the market price is $0.40 cents (selling 2,000,000 shares) and the average closing price had been for the 10 days preceding the put date has been $0.40 cents, then the floor price would be $0.30 cents. If the market pricesignificantly impairment of our stockbusiness, including the loss of coal deposits under management, loss of revenue, loss of certain operational divisions, and/or additional costs incurred by our business.
A defect in title or the loss of a leasehold interest in certain property could limit our ability to go below $0.30 centsmine 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 closeloss of a lease could adversely affect our ability to mine the 3rd dayassociated 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 the valuation period, then the investor is not obligatedother third parties or to buy 1/10th of the number of shares (or 200,000 shares) requiredroyalties owed to be boughtthose third parties. In order to conduct our mining operations on the 4th day of the 10 day period since the put notice date. If the 4th day closing is $0.32 cents then the Investor would buy 1/10th of the 2,000,000 shares (or 200,000 shares) at $0.32 cents less 10% discount (or at$0.29 cents) on the 5th trading day. If on the 6th and the 7th date of the 10 day period if the price remains lower than the floor price of $0.30 cents then the Investor would buy only the 4/10th of the number of shares on the put notice or only 400,000 shares at the market prices above $0.30 cents per share (after 10% discount). Those three days of price decline of our shares below the floor price has made that put notice eligible only to sell 4/10th of the shares that represented the first 3 days and the 5th day of the 10 days period. Ifproperties where these defects exist, we wish to sell more shares to the investor after this put sale notice, that willmay incur unanticipated costs. In addition, some leases require us to produce a new put notice pricedminimum 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 average marketall 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 preceding 10 daysour 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:
●
improper coal qualities and characteristics that don’t meet delivery specifications;
●
delay in the broker and/or intermediaries’ receipt of payment(s);
●
fraudulent activity of the broker and/or intermediary; and
●
bankruptcy of the broker and/or intermediary.
Any failure to receive payment from our brokers and/or intermediaries could result in severe impairment or bankruptcy of our business.
Furthermore, for the
Investorcoal we may sell directly to
buythe end-customer, our
shares.
TEN PERCENT LIMITATION. On each Closing Date,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 Put Shares thenregulatory 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 purchased by Investor shallsubstantial 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.
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 exceeduse them effectively.
Although we intend to use a portion of the
numbernet 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
shares that, when aggregatedproceeds, including for any of the purposes described in “Use of Proceeds.” Accordingly, you will have to rely upon the judgment of our management with
all other sharesrespect to the use of
Common Stock then owned by Investor beneficiallythe proceeds, with only limited information concerning management’s specific intentions. Our management may spend a portion or
deemed beneficially owned by Investor, would result in Investor owning more than 9.99% of all of
such Common Stock as would be outstanding on such Closing Date, as determined in accordance with Section 16 of the
Exchange Act and the regulations promulgated thereunder.
MATERIAL TERMS OF EQUITY PURCHASE AGREEMENT WITH SOUTHRIDGE
In addition to the above stated terms that described the Determination of the offering price following is a summary of the material terms of the Equity Purchase Agreement (EqPA) that we have with Southridge. Full agreement is filed as Exhibit 10.9 of S-1 we filed on March 28, 2016.
EqPA that we have signed with Southridge is a pivotal part of this prospectus since it is per that agreement we plan to sell 7,500,000 shares to receive $3 million (less the discount of 10%) to fund our future operations and any acquisitions. Commitment period of this equity line shall commence on the Effective Date of this prospectus and end on the earlier of (i) the date on which Investor shall have purchased Put Shares pursuant to this Agreement for an aggregate Purchase Price of the Maximum Commitment Amount of $3,000,000, or (ii) the date occurring twenty four (24) months from the date of commencement of the Commitment Period.
As a condition for the execution of this Agreement by Southridge, the Company has to pay to the Investor the principal amount equal to $50,000.00 on December 30, 2016 with 7% per annum interest. This obligation is described in the Promissory Note (the “Note”) we signed with Southridge on March 23, 2016 (filed as EX 10.11 with the SEC on March 28, 2016). The Note shall have no registration rights. This note has no conversion feature. Currently the company has the ability and intend to pay this $50,000 loan from its current funds and anticipated cash proceeds from its subsidiary without depending on anynet proceeds from this offering andin 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 this indebtedness will not be reduced or relivedcash we generate from operations following the payment of fees and expenses, by the issuancerestrictions 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
shares under this equity purchase agreement (also please see the risk factors).
The Company does not getdividends, if any, funds by selling these sharesis subject to the public directly but get fundsdiscretion 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:
| ● | | the development of our properties into producing coal mines; |
| ● | | the ability to begin generating significant revenues and operating cash flows; |
| ● | | 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; |
| ● | | unexpected operational events or geological conditions; |
| ● | | 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; |
| ● | | the level of our operating costs; |
| ● | | prevailing global and regional economic and political conditions; |
| ● | | changes in interest rates; |
| ● | | the impact of domestic and foreign governmental laws and regulations, including environmental and climate change regulations and regulations affecting the coal mining industry; |
| ● | | delays in the receipt of, failure to receive, failure to maintain or revocation of necessary governmental permits; |
| ● | | modification or revocation of our dividend policy by our board of directors; and |
| ● | | the amount of any cash reserves established by our board of directors. |
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 selling these shares directlynon-cash items. We may incur other expenses or liabilities that could reduce or eliminate the cash available for distribution as dividends.
We currently pay an 8.0% annual dividend on our Series B preferred stock, of which an accrued amount is recorded of $87,157, as of June 30, 2018, and will continue to Southridge. These shares seek registration so that Southridge could sell themaccrue to the public. Series B preferred stock holder.
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 salerequirements 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:
| ● | | institute a more comprehensive compliance function; |
| ● | | comply with rules promulgated by the OTCQB or any other exchange that lists our shares; |
| ● | | continue to prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws; |
| ● | | establish new internal policies, such as those relating to insider trading; and |
| ● | | involve and retain to a greater degree outside counsel and accountants in the above activities. |
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
registered sharesinternal controls until our first annual report subsequent to
Southridge is done by the Company issuing a put notice to Southridge substantially in the form of Exhibit A filed as part of Equity Purchase Agreement filed with the SEC with on March 28, 2016.
On the Put Date the Company has to deliver to Investor’s brokerage account estimated put shares equal to the Investment Amount indicated in the Put Notice divided by the Closing Price on the Trading Day immediately preceding the Put Date, multiplied by one
14
hundred twenty five percent (125%) (the “Estimated Put Shares”). On the Trading Date immediately following delivery of the Estimated Put Shares, Investor has to deliver payment by check or wire transfer to the Company an amount equal to the par value of the Estimated Put Shares (“Par Value Payment”).
So long as this Agreement remains in effect the Company, without the prior written consent of the Investor, cannot enter into any other equity line of credit agreement with a third party during the Commitment Period having terms and conditions substantially comparable to this Agreement. However, thus restriction does not apply to the Investor's consent for, any agreement providing for the issuance or distribution of (or the issuance or distribution of) any equity securities pursuant to any agreement or arrangement that is not commonly understoodour ceasing to be an "equity line“emerging growth company” within the meaning of credit."
MATERIAL TERMS OF THE PROMISSORY NOTE TO SOUTHRIDGE
We have signed a promissory note for $50,000.00 (the “Note”) to be paid to Southridge (the “Holder”) on December 30, 2016 with 7% accrued interest per annum on the outstanding principal amount as partSection 2(a)(19) of the executionSecurities Act. Accordingly, we may not be required to have our independent registered public accounting firm attest to the effectiveness of our Equity Purchase Agreement. This Note has no registration rights or any conversion feature and will be an obligation ofinternal controls until as late as our annual report for the Company. This notefiscal year ending December 31, 2018. Once it is governed by the laws of the State of New York. Inrequired to do so, our independent registered public accounting firm may issue a report that is adverse in the event thereit is an “Event of Default” on this Note then at the option of the Holder’s discretion the Holder may consider this Note immediately due and payable within five (5) days of notice. In the event the Note is placed by Holder in the hands of an attorney for collection due to a default, the Company agrees to pay any costs the Holder incurs with reference to that.
Following are some of the events that may construe this Note to be in default:
a.
The Company default on the payment of principal and interest on this Note for a period of five (5) days; Or
b.
Any representation or warranties made by the Company in connectionnot satisfied with the executionlevel at which our controls are documented, designed, operated or reviewed. Compliance with these requirements may strain our resources, increase our costs and deliverydistract 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
this Note is falsedirectors or
misleading in any material respectas executive officers. We are currently evaluating these rules, and we cannot predict or estimate the
time made: Orc.
The Companyamount of additional costs we may incur or the timing of such costs.
If we fail to
performdevelop or
observe,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
any material respect any other covenant, term, provision, condition, agreement or obligation on any noteour financial reporting, which would harm our business and
such failure continue uncured for a period of thirty (30) days after written notice from Southridge of such failure: Ord.
The Company admit in writing its inability to pay its debts generally as they mature, or make an assignment for the benefit of creditors or commence proceedings for its dissolution or apply for or consent to the appointment of a trustee, liquidator or receiver for substantial part of its property or business; Or
e.
Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency assume custody or control of the whole or any substantial portion of the properties or assets of the Company and not dismissed within sixty (60) days or thereafter; or
f.
Bankruptcy, reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law of the relief of debtors instituted by the Company; Or
g.
The Company have its Common Stock suspended or delisted from an exchange or over-the-counter market from trading for in excess of five trading days.
We have a copy of the complete Promissory Note filed as Exhibit 10.11 of S-1 we filed on March 28, 2016.
DILUTION
Under the Equity Purchase Agreement (“EqPA”), the purchase price of the shares to be sold to Southridge will be at a price equal to 90% of the Market Price of our common stock. The table below illustrates an issuance
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.
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
sharesthe Sarbanes Oxley Act of
common stock2002. Any failure to
Southridge underdevelop 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
EqPA for a hypothetical draw down amount of $100,000 at an assumed Market Price of $0.40.
| | | | | |
| Draw Down Amount | | Price to be paid by Southridge | | Number of Shares to be issued |
$ | 100,000 | $ | 0.36 | | 277,778 |
By comparison, if the Market Pricetrading price of our common stock was $0.20, the number of shares that we would be required to issue in order to have the same draw down amount of $100,000 would be greater, as shown by the following table:
| | | | | |
| Draw Down Amount | | Price to be paid by Southridge | | Number of Shares to be issued |
$ | 100,000 | $ | 0.18 | | 555,556 |
15
Accordingly, there would be dilution of an additional 277,778 shares issued due to the lower stock price of $0.20 per share. In effect, if we are interested in receiving a fixed funding amount, a lower price per share of our common stock means a higher number of shares to be issued to Southridge in order to receive that fixed funding amount, which equates to greater dilution of existing stockholders. stock.
The
effect of this dilution may, in turn, cause theoffering price of our common stock
to decrease further, both becausemay not be indicative of
the downward pressure on the stock price that would be caused by a large number of sales of our shares into the public market by Southridge, and because our existing stockholders may disagree with a decision to sell shares to Southridge at a time when our stock price is low, and may in response decide to sell additional numbers of shares, further decreasing our stock price.
The actual number of shares that will be issued to Southridge under the EqPA will depend upon the market price of our common stock atafter this offering or throughout the timecourse of our puts to Southridge.
Likelihoodsale of Accessing the Full Amountshares 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 EqPA
Notwithstanding that the EqPA is in an amount of $3,000,000, the likelihood that we would access the full $3,000,000 is low. This is due to several factors including the fact that the EqPA's share volume limitations will limit our usesale of the EqPA whenshares under this offering.
Prior to this offering, our common stock was very thinly traded on the OTCQB 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
changes. We have determined to registerof our common stock, you could lose a substantial part or all of your investment in
this registration statement a totalour common stock. The offering price will be negotiated between us and the buyer(s) of
7,500,000 shares, which representthe common stock and may be more or less than
one-third of our public float (after subtracting the
holdings of insiders and controlling shareholders) in order to allow the greatest possible flexibility under the EqPA. The amount of shares that might be utilized under the EqPA cannot be determined at this time as it will fluctuate withexpected offering price or the market price of our stock
at the time of the sale, and
our financial requirements.
Following table illustrated the amountmay not be indicative of money we will receive after our discount to Southridge in the event market price remains at .40 cents and if the market price decreased to .20 cents:
| | | |
If the market price remains .40 cents per share | |
| No of shares | Price | Proceeds |
Total Proceeds | 7,500,000 | 0.4 | 3,000,000 |
Discount | 7,500,000 | 0.04 | 300,000 |
Net proceeds | 7,500,000 | 0.36 | 2,700,000 |
| | | |
If the price goes down to .20 cents per share | |
Total Proceeds | 7,500,000 | 0.2 | 1,500,000 |
Discount | 7,500,000 | 0.02 | 150,000 |
Net proceeds | 7,500,000 | 0.18 | 1,350,000 |
SELLING SECURITY HOLDERS
The following table details the name of each selling stockholder, the number of shares owned by Southridge Partners II, LP (“Southridge”) the sole selling stockholder, and the number of shares that may be offered by Southridge Partners II, LP is not a broker-dealer. Southridge is deemed an underwriter and therefore this offering is also considered an indirect primary offering. Southridge may sell up to 7,500,000 shares, which are issuable upon the exercise of our put right with Southridge. Southridge will not assign its obligations under the equity line of credit.
| | | | |
Name | Total number of shares owned prior to offering | Percentage of shares owned prior to offering | Number of shares being offered | Percentage of shares owned after the offering assuming all of the shares are sold in the offering (1) |
| | | | |
Southridge Partners II, LP (2) | 0 | 0 | 7,500,000 | 0% |
(1)
The number assumes the Selling Security Holder sells all of its shares being offering pursuant to this prospectus.
(2)
Stephen Hicks possesses voting power and investment power over shares which may be held by Southridge.
RELATIONSHIP BETWEEN THE ISSUER AND THE SELLING SECURITY HOLDER
16
The selling security holder and its affiliates have not at any time during the past three years acted as one of our employees, officers or directors or had a material relationship with us.
PLAN OF DISTRIBUTION
This prospectus relates to the resale of 7,500,000 Shares of our common stock par value $0.0001 per share, by the Selling Security Holder consisting of Put Shares that we will putafter this offering. Consequently, you may not be able to Southridge pursuant to the Equity Purchase Agreement.
The Selling Security Holder may, from time to time, sell any or all of its shares of our common stock on anyat prices equal to or greater than the price paid by you in this offering and the common stock exchange,offered under this prospectus may be sold significantly less than the market or trading facility on which the shares are traded or in private transactions. The Selling Security Holders may use any one or moreprice of the stock or the anticipated offering price.
The following
methods when selling shares:
·
ordinary brokerage transactions and transactionsfactors could affect our stock price:
| ● | | our operating and financial performance; |
| ● | | quarterly variations in the rate of growth of our financial indicators, such as net income per share, net income and revenues; |
| ● | | the public reaction to our press releases, our other public announcements and our filings with the SEC; |
| ● | | strategic actions by our competitors; |
| ● | | changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts; |
| ● | | speculation in the press or investment community; |
| ● | | the failure of research analysts to cover our common stock; |
| ● | | sales of our common stock by us or underwriters, should we decide to engage underwriters (which we have no agreements or plans to engage at this time), or the perception that such sales may occur; |
| ● | | our payment of dividends; |
| ● | | changes in accounting principles, policies, guidance, interpretations or standards; |
| ● | | additions or departures of key management personnel; |
| ● | | actions by our stockholders; |
| ● | | general market conditions, including fluctuations in commodity prices; |
| ● | | domestic and international economic, legal and regulatory factors unrelated to our performance; and |
| ● | | the realization of any risks described under this “Risk Factors” section. |
The stock markets in
which the broker-dealer solicits purchasers;·
block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;
·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
·
an exchange distribution in accordance with the rules of the applicable exchange;
·
privately negotiated transactions;
·
broker-dealers may agree with the Selling Security Holders to sell a specified number of such shares at a stipulated price per share;
·
through the writing of options on the shares;
·
a combination of any such methods of sale; and
·
any other method permitted pursuant to applicable law.
Accordinggeneral have experienced extreme volatility that has often been unrelated to the termsoperating performance of particular companies. These broad market fluctuations may adversely affect the Purchase Agreement, neither Southridge nor any affiliate of Southridge acting on its behalf or pursuant to any understanding with it will execute any short sales during the term of this offering.
The Selling Security Holder may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Security Holder and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that a Selling Security Holder will attempt to sell shares of Common Stock in block transactions to market makers or other purchasers at atrading price per share which may be below the then market price. The Selling Security Holder cannot assure that all or any of the shares offered in this prospectus will be issued to, or sold by, the Selling Security Holders. In addition, the Selling Security Holders and any brokers, dealers or agents, upon effecting the sale of any of the shares offered in this prospectus are “underwriters” as that term is defined under the Securities Act or the Exchange Act, or the rules and regulations under such acts. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.
Discounts, concessions, commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by a Selling Security Holder. The Selling Security Holder may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares if liabilities are imposed on that person under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the shares of common stock. Otherwise, all discounts, commissions or fees incurred in connection with the sale of our common stock offered hereby will be paid by the Selling Security Holder.
The Selling Security Holder acquired the securities offered herebystock. Securities class action litigation has often been instituted against companies following periods of volatility in the ordinary courseoverall market and in the market price of business and has adviseda company’s securities. Such litigation, if instituted against us, that it has not entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their shares of common stock, nor is there an underwriter or coordinating broker acting in connection with a proposed sale of shares of common stock by the Selling Security Holder. We will file a supplement to this prospectus if the Selling Security Holder enters into a material arrangement with a broker-dealer for sale of common stock being registered. If the Selling Security Holder uses this prospectus for any sale of the shares of common stock, it will be subject to the prospectus delivery requirements of the Securities Act.
The anti-manipulation rules of Regulation M under the Exchange Act, may apply to sales of our common stock and activities of the Selling Security Holder. The Selling Security Holder will act independently of us in making decisions with respect to the timing, manner and size of each sale.
17
Southridge is an “underwriter” within the meaning of the Securities Act in connection with the sale of our common stock under the Equity Purchase Agreement. For each share of common stock purchased under the Purchase Agreement, Southridge will pay 90% of the lowest Bid Prices during the Valuation Period. On each Closing Date, the number of Put Shares then to be purchased by Investor shall not exceed the number of such shares that, when aggregated with all other shares of Common Stock then owned by Investor beneficially or deemed beneficially owned by Investor, wouldcould result in Investor owning more than 9.99% of all of such Common Stock as would be outstanding on such Closing Date, as determined in accordance with Section 16 of the Exchange Actvery substantial costs, divert our management’s attention and the regulations promulgated thereunder. For purposes of this Section, in the event that the amount of Common Stock outstanding as determined in accordance with Section 16 of the Exchange Actresources and the regulations promulgated thereunder is greater on a Closing Date than on the date upon which the Put Notice associated with such Closing Date is given, the amount of Common Stock outstanding on such Closing Date shall govern for purposes of determining whether Investor, when aggregating all purchases of Common Stock made pursuant to this Agreement, would own more than 9.99% of the Common Stock following such Closing Date.
Weharm our business, operating results and financial condition.
The Series A Preferred shareholders will
pay all expenses incident to the registration, offering and sale of the shares of our common stock to the public hereunder other than commissions, fees and discounts of underwriters, brokers, dealers and agents. If any of these other expenses exists, we expect Southridge to pay these expenses. We have agreed to indemnify Southridge and its controlling persons against certain liabilities, including liabilities under the Securities Act. We estimate that the expenses of the offering to be borne by us will be approximately $23,000. We will not receive any proceeds from the resale of any of the shares of our common stock by Southridge. We may, however, receive proceeds from the sale of our common stock under the Purchase Agreement.
Sales Pursuant to Rule 144
Any shares of common stock covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act, as amended, may be sold under Rule 144 rather than pursuant to this prospectus.
State Securities Laws
Under the securities laws of some states, the shares may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares may not be sold unless the shares have been registered or qualified for sale in the state or an exemption from registration or qualification is available and is complied with.
Expenses of Registration
We are bearing all costs relating to the registration of the common stock. These expenses are estimated to be $23,000 including, but not limited to, legal, accounting, printing and mailing fees. The selling stockholders, however, will pay any commissions or other fees payable to brokers or dealers in connection with any sale of the common stock.
DESCRIPTION OF SECURITIES TO BE REGISTERED
General
We are authorized to issue an aggregate number of 300,000,000 shares of capital stock, of which (i) 230,000,000 shares are Common Stock, $0.0001 par value per share; (ii) 60,000,000 shares are Class B common stock, par value $0.0001 per share; and (iii) 10,000,000 shares of blank-check preferred stock, $0.0001 par value per share.
Class A Common Stock
We are authorized to issue 230,000,000 shares of Common Stock. As of the filing date of this report, 25,092,674 shares of the Common Stock are issued and outstanding.
Each share of Common Stock shall have one (1) vote per share for all purposes. Our common stock does not provide a preemptive or conversion right and there are no redemption or sinking fund provisions or rights. Holders of our Common Stock are not entitled to cumulative voting for election of the Company’s board of directors.
The holders of our Common Stock are entitled to dividends out of funds legally available when and as declared by our board of directors. Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future.
Class B Common Stock
We are authorized to issue 60,000,000 shares of Class B common stock. As of the filing date of this report, 7,000,000 shares of Class B common stock are issued and outstanding.
18
Each share of Class B common stock shall entitle the holder to ten (10) votes for each one vote per share of the Common Stock, and with respect to that vote, shall be entitled to notice of any stockholders’ meeting in accordance with the Company’s bylaws, and shall be entitled to vote, together as a single class with the holders of Common Stock with respect to any question or matter upon which the holders of Common Stock have the rightability to vote. Class B common stock shall also entitle a holder to vote as a separate class as set forth indirect the Company’s bylaws.
The holdersvoting of our Class B common stock are entitled to dividends out of funds legally available when and as declared by our board of directors at the same rate per share as the Common Stock. Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future.
Each share of Class B common stock is convertible into one (1) share of Common Stock, subject to adjustment, at any time at the option of the holder.
All outstanding shares of Class B common stock are duly authorized, validly issued, fully paid and non-assessable. So long as any shares of Class B common stock are outstanding, we have agreed not to take the following actions without the prior written consent of the holders of at least a majority of the voting power of our common stock, and their interests may conflict with those of our other stockholders.
Upon completion of this offering, the
then outstanding Class BSeries A Preferred shareholders will hold a voting control equivalent to 79.6% of our common
stock:stock. As a result, the Series A Preferred shareholders will be able to control matters requiring stockholder approval, including the election of directors, changes to our organizational documents and significant corporate transactions. This concentration of ownership makes it unlikely that any other holder or group of holders of our common stock will be able to affect the way we are managed or the direction of our business. The interests of the Series A Preferred shareholders with respect to matters potentially or actually involving or affecting us, such as future acquisitions, financings and other corporate opportunities and attempts to acquire us, may conflict with the interests of our other stockholders. Given this concentrated voting control, the Series A Preferred shareholders would have to approve any potential acquisition of us. See “Certain Relationships and Related Party Transactions—Stockholders’ Agreement”. The Series A Preferred shareholders’ concentration of voting control may also adversely affect the trading price of our common stock to the extent investors perceive a disadvantage in owning stock of a company with significant stockholders.
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:
| ● | | | limitations on the removal of directors; |
| ·
● | sell, convey or otherwise dispose of or encumber all or substantially all
| limitations on the ability of our assets,stockholders to call special meetings; |
| ● | | establishing advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders; |
| ● | | providing that the board of directors is expressly authorized to adopt, or merger with or consolidate with another corporation, other than our wholly-owned subsidiary, or effect any transaction or series of transactions in which more than 50% of the voting power of our company is transferred or disposed of; |
| | |
| ·
| to alter or change any of the rights of the Class B common stock or increase or decrease the number of shares authorized; repeal our bylaws; and |
| | |
| ● | ·
| authorize or obligate our companyestablishing advance notice and certain information requirements for nominations for election to authorize any other equity security or security which is convertible or exercisable into an equity security of our company which has rights, preferences or privileges which are superior to, on a parity with or similar to the Class B common stock;
|
| | |
| ·
| redeem or repurchase any of our securities;
|
| | |
| ·
| amend our articles of incorporation; or
|
| | |
| ·
| change the authorized number of our board of directors.
directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. |
Investors in this offering will experience immediate and substantial dilution.
This offering is being done on a delayed or continual basis pursuant to Rule 415 under the Securities Act of 1933, and as a result, the sale of up to 40 million 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 41,192,044 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 authorizednot 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, up to 10,000,000 shareswithout the approval of preferred stock, par value $0.0001 per share, inour stockholders, one or more classes or series within a classof preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock respecting dividends and distributions, as may be determined by our board of directors who may establish, from timedetermine. 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 time, theelect some number of sharesour 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.
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, 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, 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 includedless 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 each classthe financial markets, which in turn could cause our stock price or series,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.
If we decide to engage underwriters and/or broker-dealer as part of our offering of the securities under this prospectus, there may fixbe additional fees incurred by the designation, powers, preferences and rightsCompany.
While we initial intend to offer the shares under this prospectus on a delay or continual basis pursuant to Rule 415 under the Securities Act of 1933 on a self-underwritten basis, we may decide to engage an underwriter/broker-dealer to assist with the sale of the shares, of each such class or series and any qualifications, limitations or restrictions thereof. Any preferred stock so issuedwhich may result in underwriting fees incurred by the boardCompany that will reduce the net proceeds available to us.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The information in this prospectus includes “forward-looking statements.” All statements, other than statements of directorshistorical 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.
Forward-looking statements may rank seniorinclude 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 existing classesexpenses 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;
●
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 stockequipment or commodities such as diesel fuel, steel, explosives and tires;
●
the existence of registration rights with respect to the paymentsecurities being offered and the costs of dividendscompliance or amounts upon liquidation, dissolutionpenalties for noncompliance with such rights;
●
the amount of expenses and other liabilities incurred or winding upaccrued after the completion of us,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 both. Moreover, while providing desirable flexibilitymore 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 possibleany 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.
USE OF PROCEEDS
We expect to receive approximately $48 million of net proceeds from the sale of the common stock offered by us.
We intend to use approximately $5 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 $18 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 $10 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 other corporate purposes, undermining supplies and are dependent on the amount of rehabilitation and the existing conditions at the idled mine.
We intend to use approximately $3 million for partial repayment of certain circumstances, thedebt 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 $12 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 the Series B preferred stock accrued dividend amounts. The Series B preferred stock has so far accrued dividends in the amount of $87,157 to the principal balance as of June 30, 2018, none of which has been satisfied, partially or the existencein whole, via cash or stock.
The expected use of the
unissued preferred stock might tendnet 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
discourage or render more difficult a merger or other changefund our initial phase of
control. Currently, no sharesprojected capital expenditures. However, the amounts and timing of our
preferred stockactual 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
been designated any rights and we have no shares of preferred stock issued and outstanding.Warrants
There are no outstanding warrants to purchase our securities.
Options
As the General Partner of NGFC Limited Partnership, we have given the option for Limited Partners of NGFC Limited Partnership to convert 100% of their contributed capital—regardless of any unrealized losses but adjusted by any withdrawals they have made—to shares of NGFC at 0.30 cents per share by March 31, 2017.
On May 19, 2016 the Board of Directors approved NGFC to resign as the general partner of NGLP sincebroad discretion in the event the investment by NGLP in public company stocks to be more than 40%use of the total assets, that may require us to register NGFC under the Investment Company Act of 1940, that we would like to avoid since the purpose of NGFC is to acquire companies to operate through subsidiaries and not benet proceeds from this offering.
DETERMINATION OF OFFERING PRICE
Before this offering, there has been a
passive investor while it is more practicalvery limited public trading market for
NGLP to make a better return on the money NGLP is holding by investing in any alternative investments while NGLP still consider acquiring land and building that house operating gasoline
19
stations to rent to Energy and Retail division of NGFC to get a fixed return on their money. Due to this event, NGFC will no longer include NGLP financial statements as part of its consolidated financial statements. The Board approved NGFC resigning as the General Partners effective end of the day May 20, 2016. Thus NGFC will receive the 30% of the share of the gains from NGLP through end of the day May 20, 2016.
The option the current Limited Partners of NGLP have as of May 20, 2016 to convert 100% of their capital to NGFC shares at $0.30 per shares by March 31, 2017 will stay effective even after NGFC resign as the GP. If this conversion feature was executed by all 14 limited partners then their total capital (if any of them did not withdraw prior to March 31, 2017) of $535,350 could be converted at $0.30 cents per share to 1,784,500our 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 NGFC.
However, this option to convert limited partnership interest tothe shares of NGFCCommon 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 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;
●
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.
PLAN OF DISTRIBUTION
We are offering up to a total of 40,000,000 shares of Common Stock through a self-directed offering and/or through the use of an underwriter/broker-dealer at an initial offering price of $1.20 per share on a best-efforts basis. We have not yet engaged an underwriter with respect to this offering and have no definitive plans or agreements to do so at this time. There is no minimum offering and no minimum number of shares must be sold before we use the proceeds. Proceeds will not be givenreturned to any additional contributions to NGLP since NGFC is no longerinvestors if we sell less than all of the general partner of NGFC. Also this conversion option will expire as of March 31, 2017 even for the current limited partners
Convertible Securities
We do not have outstanding any securities convertible into shares of our common stock or any rights convertible or exchangeable intoCommon Stock being offered in this prospectus. The proceeds from the sales of the shares will be paid directly to us by a subscriber for our Common Stock and will not be placed in an escrow account.
There is currently a very limited public trading market for shares of our
common stock.Transfer AgentCommon Stock, and Registrar
Our transfer agentwe cannot give any assurance to you that the shares offered by this prospectus can be resold for at least the offered price if and when an active secondary market might develop, or that a public market for our Common Stock will be sustained even if one is VStock Transfer. Theyultimately developed. We are located at 18 Lafayette Place, Woodmere, NY 11598. Their telephone numberoffering the shares of our Common Stock directly through a broker/dealer, who is (212) 828-8436 and their facsimile number is (646) 536-3179.
acting on our behalf with respect to the sales of the Common Stock.
Section 15(g) of the Securities Exchange Act of 1934 – “Penny Stock” Disclosure
Our shares of Common Stock are “penny stock” covered by Section 15(g) of the Exchange Act, and Rules 15g-1 through 15g-6 promulgated under the Exchange Act. They impose additional sales practice requirements on broker/dealers who sell securities to persons other than established customers and accredited investors, which are generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouses. For transactions covered by these rules, the broker/dealer must make a special suitability determination for the purchase and have received the purchaser’s written agreement to the transaction prior to the sale. Consequently, the rules may affect the ability of broker/dealers to sell our securities and also may affect your ability to resell your shares.
Section 15(g) also imposes additional sales practice requirements on broker/dealers who sell penny stock. These rules require a one-page summary of certain essential items. The items include the risk of investing in penny stocks in both public offerings and secondary marketing; terms important to an understanding of the function of the penny stock market, such as “bid” and “offer” quotes, a dealers “spread” and broker/dealer compensation; the broker/dealer compensation, the broker/dealer’s duties to its customers, including the disclosures required by any other penny stock disclosure rules; the customers’ rights and remedies in cases of fraud in penny stock transactions; and the Financial Industry Regulatory Authority’s toll-free telephone number and the central number of the North American Securities Administrators Association (NASAA), for information on the disciplinary history of broker/dealers and their associated persons. Rules 15g-1 through 15g-6 which apply to broker/dealers but not our company are summarized as follows:
| | |
| ·
| Rule 15g-1 exempts a number of specific transactions from the scope of the penny stock rules;
|
| | |
| ·
| Rule 15g-2 declares unlawful broker/dealer transactions in penny stock unless the broker/dealer has first provided
to the customer a standardized disclosure document;
|
| | |
| ·
| Rule 15g-3 provides that it is unlawful for a broker/dealer to engage in a penny stock transaction unless the broker/
dealer first discloses and subsequently confirms to the customer current quotation prices or similar market
information concerning the penny stock in question
|
| | |
| ·
| Rule 15g-4 prohibits broker/dealers from completing penny stock transactions for a customer unless the broker/dealer
first discloses to the customer the amount of compensation or other remuneration received as a result of the penny
stock transaction;
|
●
| | |
| ·
| Rule 15g-5 requires that a broker/dealer executing a penny stock transaction, other than one exempt under
Rule 15g-1, disclose to its customer, at the time of or prior to the transaction, information about the sales
person’s compensation; and
|
20
Rule 15g-1 exempts a number of specific transactions from the scope of the penny stock rules; | | |
| ·
| Rule 15g-6 requires broker/dealers selling penny stock to provide their customers with monthly account statements.
|
●
Rule 15g-2 declares unlawful broker/dealer transactions in penny stock unless the broker/dealer has first provided to the customer a standardized disclosure document;
●
Rule 15g-3 provides that it is unlawful for a broker/dealer to engage in a penny stock transaction unless the broker/dealer first discloses and subsequently confirms to the customer current quotation prices or similar market information concerning the penny stock in question;
●
Rule 15g-4 prohibits broker/dealers from completing penny stock transactions for a customer unless the broker/dealer first discloses to the customer the amount of compensation or other remuneration received as a result of the penny stock transaction;
●
Rule 15g-5 requires that a broker/dealer executing a penny stock transaction, other than one exempt under Rule 15g-1, disclose to its customer, at the time of or prior to the transaction, information about the sales person’s compensation; and
●
Rule 15g-6 requires broker/dealers selling penny stock to provide their customers with monthly account statements.
The application of the penny stock rules may affect your ability to resell your shares of Common Stock because many brokers are unwilling to buy, sell or trade penny stock as a result of the additional sales practices imposed upon them which are described in this section.
DESCRIPTION OF SECURITIES TO BE REGISTERED
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 41,192,044 Class A Common Shares will be issued and outstanding, 5,000,000 shares of Series A Preferred shares, $0.001 par value per share, of which 4,817,792 Series A Preferred shares will be issued and outstanding, 20,000,000 shares of Series B Preferred shares, $0.001 par value per share, of which 850,000 Series B Preferred shares will be issued and outstanding (excluding the Series B Preferred accrued 8.0% annual dividend – see “Series B Preferred Stock” below), and 70,000,000 “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, 4,817,792 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 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.
Dividend Rights. The holders of the Series A Preferred stock are not entitled to receive dividends.
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.
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 B 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 B Preferred stock, par value $0.001 per share, covering up to an aggregate of 20,000,000 shares of Series B Preferred stock. The Series B 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 June 30, 2018, 850,000 shares of Series B Preferred stock are outstanding and accrued dividend in the amount of $87,157 as part of the 8.0% annual dividend on the Series B Preferred, as described below. See “Security Ownership of Certain Beneficial Owners and Management” for more detail on the Series B Preferred stock holders.
Voting Rights. The holders of Series B Preferred shares are entitled to no voting rights until the holder converts any or all of their Series B Preferred shares to common shares.
Dividend Rights. The holders of the Series B Preferred shall accrue a dividend based on an 8.0% annual percentage rate, compounded quarterly in arrears, for any Series B Preferred stock that is outstanding at the end of such prior quarter.
Conversion Rights. The holders of the Series B Preferred stock are entitled to convert into common shares, at the holder’s discretion, at a conversion price of Three Dollars Sixty Cents ($3.60) per share of Common stock, subject to certain price adjustments found in the Series B Preferred stock purchase agreements.
Liquidation Rights. Upon our liquidation, dissolution, distribution of assets or other winding up, the holders of Series B Preferred shares shall have a liquidation preference to the Common shares and Series A Preferred shares outstanding in the amount equal to the amount initially invested by the Series B Preferred holder in the Series B Preferred stock at the time of such investment minus the pro rata amount that has been converted into common stock or redeemed.
“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 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.
Should all Series B Preferred stock option holders fully exercise their right to purchase shares, for cash, the Company will receive $1,702,090 proceeds from such exercises and will increase the common shares outstanding by 305,557 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.
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. 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 and 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. 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.
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 OTCQB markets under the symbol “AREC”.
INTERESTS OF NAMED EXPERTS AND COUNSEL
Our financial statements as of September 30, 2015, and for the period of inception (October 2, 2013) to September 30, 2014, included in this prospectus have been audited by MaloneBailey, LLP, 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 financial statements as of December 31, 2015, and for the period of three months to December 31, 2015, included in this prospectus are unaudited and have been prepared by the management of the Company.
LEGAL MATTERS
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
JJ. Hunt,
Esq. Mr.P.A. The law firm’s principal, Clifford J. Hunt,
owns 45,000Esquire, is the beneficial owner of 1,721 shares of our common stock.
WHERE YOU CAN FIND ADDITIONAL
INFORMATION
We have filed with the SEC the registration statement on Form S-1 under the Securities Act for the Common Stock offered by this prospectus. This prospectus, which is a part WITH RESPECT TO THE REGISTRANT
Description of
the registration statement, does not contain all of the information in the registration statement and the exhibits filed with it, portions of which have been omitted as permitted by SEC rules and regulations. For further information concerning us and the securities offered by this prospectus, we refer to the registration statement and to the exhibits filed with it. Statements contained in this prospectus as to the content of any contract or other document referred to are not necessarily complete. In each instance, we refer you to the copy of the contracts and/or other documents filed as exhibits to the registration statement.This registration statement on Form S-1, including exhibits, is available over the Internet at the SEC’s web site at http://www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facilities:
Public Reference Room Office
100 F. Street, N.E., Room 1580
Washington, D.C. 20549
You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Room 1580, Washington D.C. 20549. Callers in the United States can also call 1-202-551-8090 for further information on the operations of the public reference facilities.
DESCRIPTION OF BUSINESS
Company Overview
The purpose of NGFC Equities, Inc. is to conduct business as a holding company operating diversified businesses globally through operating subsidiaries.
Operating Strategy
Currently we have broken down our business to three divisions as follows:
Energy and Retail Division
Healthcare Division
Consulting Division
21
NGFC Limited Partnership
On March 24, 2015, the Company set up NGFC Limited Partnership (“NGLP”, “the Partnership”) with the Company acting as the General Partner. One objective of the Partnership was to raise funds in the private market through any exempt offerings to acquire gasoline stations that the Partnership would lease back to the Company to earn a fixed return. The Partnership also has invested a portion of its funds in the financial markets.
The Board of Directors, at a meeting held on May 19, 2016, approved NGFC to resign as the general partner of NGLP since in the event the investment by NGLP in public company stocks to be more than 40% of the total assets, that may require us to register NGFC under the Investment Company Act of 1940, that we would like to avoid since the purpose of NGFC is to acquire companies to operate through subsidiaries and not be a passive investor while it is more practical for NGLP to make a better return on the money NGLP is holding by investing in any alternative investments while NGLP still consider acquiring land and building that house operating gasoline stations to rent to Energy and Retail division of NGFC to get a fixed return on their money.
At the Board meeting held on May 19, 2016, following resolutions were approved:
1.
To appoint I. Andrew Weeraratne the CEO of NGFC as a general partner of NGLP and transfer the profit interest of NGFC to Mr. Weeraratne.
2.
To deconsolidate NGLP in filing future financial statements of NGFC.
3.
For NGFC to resign as general partner of NGFC.
4.
To keep the option the current Limited Partners of NGLP have as of May 20, 2016 to convert 100% of their capital to NGFC shares at $0.30 per shares by March 31, 2017 effective even after deconsolidation of NGLP. If this conversion feature was executed by all 14 limited partners then their total capital (if any of them did not withdraw prior to March 31, 2017) of $535,350 could be converted at $0.30 cents per share to 1,784,500 shares of Class A Common Stock of NGFC.
5.
Not to grant this option to convert limited partnership interest to shares of NGFC to any additional contributions to NGLP since NGFC is no longer will consolidate or will be the primary beneficiary of NGLP.
We filed a Form 8-K on May 20, 2016 announcing the above resolutions but later discovered that we made an error when NGFC resigned as general partner of NGLP without giving 30-days written notice to all limited partners as required by the NGLP Partnership Agreement, and therefore we filed an amended Form 8-K on July 11, 2016 withdrawing the resignation of NGFC as general partner. But since due to other resolutions approved and announced through that Form 8-k filed on May 20, 2015, were according to the partnership agreement, the deconsolidation of NGLP will go ahead as planned since as per Consolidation Topic 810 released on February 2015 by Financial Accounting Standard Board, being general partner of a partnership itself does not require the reporting person to consolidate the partnership. We plan to give the 30-days written notice to all limited partners the decision of NGFC to resign as general partner and then resign formally and file announcement with the SEC.
Since we consider this deconsolidation to be material, we have included pro forma information giving effect to our surrender of control over NGLP and its subsequent deconsolidation beginning Page No F-21 following the Financial Statements and have referred to that at various places in this prospectus.
.
ENERGY AND RETAIL DIVISION
Through our Energy and Retail Division, we have been conducting due diligence on several existing fueling stations in the Miami, Florida area which the Company believes are suitable acquisition targets. However, it remains the Company’s preference to purchase land and build an Operational Unit based on our own designs. With the proceeds in this offering, we plan to acquire land and building that houses a gasoline and diesel fuel station with a convenience store and collect rent if possible while our consulting division handles all accounting so as to keep an eye on the business (if it would be acceptable to the owners) that we eventually can put through an audit and acquire, while we raise additional money to build our Operational Units that we estimate to cost about $5,800,000 to build one Operational Unit. Currently we have no other commitments to get the funds to build our operational units and thus it may depend on us building a track record in owning a smaller gasoline and diesel fuel station that we would rent successfully and/or due to our exposure to potential investors by being in the business, for which there is no guarantee.
Our initial primary focus will be distributing gasoline and diesel fuel to customers once we build or purchase a fueling station, as we believe there are not enough NG driven vehicles in the market at this time to substantiate building only a NG station. We also plan to have liquefied natural gas (LNG) and compressed natural gas (CNG) available for NG driven vehicles as we think NG vehicles will be as common as gasoline-driven vehicles in the future. Therefore, we may acquire existing gasoline and diesel fueling stations and expand them to include NG fueling capabilities. In certain stations we plan to build (or acquire and expand), we may have gasoline and LNG only, in some stations we may have gasoline and CNG only and in other stations we may have the means to distribute
22
gasoline, diesel, LNG and CNG. Such determination will be made based on different factors such as the demand for LNG and/or CNG in each location and easy access to LNG and CNG supplies. We believe that the NG business is poised to go through significant changes in the near future and we plan to operate an extensive research department dedicated to our company adopting relevant changes as the market evolves.
When we began we were planning to construct, own and operate factories to convert NG from its gaseous state to LNG (through a process of cooling NG) to be distributed to our own fueling stations and also to fueling stations owned by other independent owners and companies. However, due to the current decline of prices in energy, we do not believe it would be viable for us to continue with this strategy and thus we plan to hold off our plans on that.
Also when we began our business in late 2013, we were planning to operate a vehicle conversion business through a joint venture relationship with Shenzhen HJ Technology Company Ltd. (“HJT”), which is currently operating a series of factories converting vehicles to operate on LNG and CNG in the Peoples’ Republic of China (“PRC” or “China”), using its patented Gas Intelligent Electric Control System (GIECS) technology. Since then we have come across a few other conversion kits from other manufacturers and looked into using other conversion kits in our planned vehicle conversion division. However, due to current decline in price of gasoline, we feel the vehicle conversion business may no longer be profitable and thus plan to hold off on that strategy as well.
On May 18, 2015 we formed Vanguard Energy Inc. (VE) in San Clemente, California as 55% stockholder with an individual Michael Laub as 45% stockholder to conduct some of the business in our Energy and Retail Division through VE. Mr. Laub is the founder and Chief Executive Officer of CNG United LLC based in San Clemente, California that deals in training installation of engines for gasoline vehicles to run on Natural Gas as well as safety and maintenance of hybrid engines and vehicles. On the 23rd of January 2016, the Board of Directors decided to discontinue the operation of VE, due to the same reasons we have mentioned elsewhere in this prospectus for holding off the vehicle conversion division, and have Mr. Laub who currently manages CNG United LLC work as a consultant for NGFC. The financial cost of setting up and discontinuing VE had been minimal to us due to the expertise of our staff in handling most administrative and filing obligations through our internal team.
The Market for Vehicle Fuels
According to the U.S. Department of Energy’s Energy Information Administration (“EIA”), in 2014, about 136.78 billion gallons (or 3.26 billion barrels) of gasoline were consumed in the United States, a daily average of about 374.74 million gallons (or 8.92 million barrels). This was about 4% less than the record high of about 142.35 billion gallons (or 3.39 billion barrels) consumed in 2007 (US department of Energy Information Administration (EIA)). Also according to EIA only 40% of the crude oil used by U.S. refineries is produced in the United States, the rest is imported from other countries. Additionally, according to the EIA, gasoline is the predominant fuel used by most passenger vehicles in the United States today. There are approximately 254 million vehicles that use gasoline, and on average each vehicle travels approximately 11,600 miles per year. Currently, there are about 162,000 fueling stations that provide refueling services for these consumers.
We believe that crude oil, gasoline and diesel fuel prices that are high relative to alternative fuel, combined with increasingly stringent federal, state and local air quality regulations, create a favorable market opportunity for alternative vehicle fuels in the United States. NG as an alternative fuel has been widely used for many years in other parts of the world such as in Europe and Latin America, based on the number of NG vehicles in operation in those regions. According to the Alternative Fuels Data Center of the U.S. Department of Energy’s Office of Energy Efficiency and Renewable Energy (the “OEE”), there are approximately 112,000 NG powered vehicles currently in the United States and approximately 14.8 million NG powered vehicles worldwide.
According to NGV America, website report in 2015, the station count in the USA has grown dramatically in the last three years, and there are now 1,591 CNG and 116 LNG natural gas stations operating in the U.S. While only a little more than half of these stations are “public access.” Investments are being made to upgrade older stations to increase capacity and improve the fueling experience. New stations are being built with an emphasis on creating a traditional fueling experience for the customer. According to corporate website of Cummins Westport Inc. (“Cummins”), a worldwide leader in the design, engineering and marketing of automotive natural gas engines for commercial transportation applications such as truck and buses, there are approximately 1,200 CNG fueling stations in the United States, compared to approximately 164,292 gasoline fueling stations in the United States as of 2007, according to the OEE’s website.
According to the EIA, in 1950, US residents used 5,766,542 million cubic feet (MMcF) of NG. In 2012, they used 25,533,448 MMcF of NG, almost 4.5 times more than the consumption level in 1950. EIA's forecast of U.S. total natural gas consumption averages 76.3 Bcf/day (Bcf/d) in 2015 and 76.8 Bcf/d in 2016, compared with 73.1 Bcf/d in 2014. EIA projects natural gas consumption in the power sector to increase by 16.8% in 2015 and then to decrease by 1.2% in 2016. Natural gas spot prices, which are expected to remain below $3/MMBtu through mid-2016, support high consumption of natural gas for electricity generation in 2015 and 2016. Industrial sector consumption of natural gas remains flat in 2015 and increases by 4.2% in 2016, as new industrial projects, particularly in the fertilizer and chemicals sectors, come online in the next few months. Natural gas consumption in the residential and
23
commercial sectors is projected to decline in both 2015 and 2016, which largely reflects lower heating demand this winter compared with last winter.
We believe this trend of increase demand and usage will continue, as is consistent with historical data, as the United States remains the biggest NG producer in the world and NG remains as a much cheaper alternative to gasoline.
Natural Gas as an Alternative Fuel for Vehicles
According to the OEE, the number of gasoline stations in the United States has been declining since 1994, when there were over 200,000 stations nationwide. Apart from a one year increase in 2005, the numbers of stations continued to decline again with a loss of more than 3,000 stations from 2006 to 2007. We believe this is primarily the result of consolidation of the industry and the advent of alternative fuels and green initiatives.
We believe that NG is an attractive alternative to gasoline and diesel for vehicle fuel in the United States because it is cheaper, cleaner and safer than gasoline or diesel. In addition, almost all NG consumed in the United States and Canada is produced from U.S. and Canadian sources. According to the EIA’s projections, U.S. total NG consumption will grow from 24.4 trillion cubic feet in 2011, to 29.5 trillion cubic feet by 2040.
NG vehicles use internal combustion engines similar to those used in gasoline or diesel powered engines. A natural gas vehicle uses airtight storage cylinders to hold CNG or LNG, specially designed fuel lines to deliver NG to the engine. NG fuels have higher octane content than gasoline or diesel, and the acceleration and other performance characteristics of NG vehicles are similar to those of gasoline or diesel powered vehicles of the same weight and engine class. NG vehicles, whether they run on CNG or LNG, are refueled using a hose and nozzle that makes an airtight seal with the vehicle’s gas tank. For heavy-duty vehicles, NG versions operate more quietly than diesel powered vehicles.
Almost any current make or model passenger car, truck, bus or other vehicle is capable of being manufactured or modified to run on NG. However, in North America, only a limited number of models of NG vehicles are available. Honda offers a factory built NG passenger vehicle, a version of its Civic 4-door sedan called the GX. A limited number of other passenger vehicles and light-duty trucks are available through small volume manufacturers. These manufacturers offer current model vehicles made by others that they have been modified to use NG and which have been certified to meet federal and state emissions and safety standards. Some GM and Ford models are now certified, including the Ford Crown Victoria, Ford E Van and GM Savanna/Express Van. Modifications involve removing the gasoline storage and fuel delivery system and replacing it with high pressure fuel storage cylinders and fuel delivery lines.
Currently, heavy-duty NG vehicles are manufactured by traditional original equipment manufacturers. These manufacturers offer some of their standard model vehicles with NG engines and components, which they make or purchase from engine manufacturers. Cummins and Deere & Company (John Deere) manufacture NG engines for medium and heavy-duty fleet applications, including transit buses, refuse trucks, delivery trucks and street sweepers.
Sources of Revenue- Energy and Retail Division
With the proceeds of this offering we plan to buy land and building housing a small gasoline station and continue to let the current operators of the gasoline station operate it while we receive rental income until we are able to audit the business and then acquire that in the future provided we find the right structure to do this. Once we get more capital (that there is no assurance) we plan to acquire more gasoline stations and also include NG bays as part of the business. We anticipate our primary source of revenue to be derived from gasoline and diesel fuel sales and sales from convenience stores in our self-constructed or acquired and expanded Operational Units. We then anticipate deriving our main source of revenue from NG fueling bays and vehicle conversion garages. In addition, we intend to also have our conversion garages do general automobile repair and maintenance in order to increase cash flow and revenues. To date, we have not constructed or acquired a fueling station.
Capital Requirements- Energy and Retail Division
We believe the funds we will get this from this offering to be enough for us to acquire land and building of a smaller gasoline station that we may begin to operate in the next few years in order take our first step into the business of operating retail gasoline stations and eventually use those locations to sell NG. To fulfill our long-term goals, we estimate that we will require approximately $3.8 million of capital to buy appropriate land and build a combined gasoline and NG fueling station and convenience store, and another $2 million to build the service station to convert vehicles to run on LNG and CNG. As discussed elsewhere in this offering, we plan to measure the profitability of the setting up conversion garages prior to setting them up. Although we do not believe the price of gasoline to stay as low as it is in the current market for too long, but if they stayed so, the market for NG vehicles may not increase in the foreseeable future and thus we may delay us setting up conversion garages.
24
We estimate the cost to acquire an established gasoline and diesel fueling station with a convenience store along with the land and expand the operation to add LNG and CNG fueling and vehicle conversion, to make it an “Operational Unit,” to be similar to the above stated cost. In the event that the Company enters into a long term lease for a fueling station and convenience store rather than purchase land, the Company anticipates that each such unit will cost approximately $1 to $2 million less due to us not having to buy land and building.
If our strategy is successful, we believe the Company will generate enough cash flow from our first fuel station to meet all or part of the cash flow needs of our corporate offices. However, we will likely have to raise additional funds to expand our planned operations through additional equity and debt offerings. There is no certainty that we will be successful in raising money from additional offerings even if we are successful with this offering.
Future Trends- Energy and Retail Division
Due to an anticipated increase in future supply of NG, we expect NG prices to stay below the prices of gasoline and diesel, making it more attractive for consumers to use NG powered vehicles. Further, because of the environmental benefits of NG, we anticipate global governments encouraging the use of NG as an alternative fuel through both direct and indirect subsidies in the form of tax credits and other methods to encourage the use of NG. We also expect the EPA to make the process of conversion of vehicles to NG to be less stringent in the future as the technology develops and the benefits of using NG becomes more apparent.
Environmental Conditions and NG Consumption
Due to tremendous decades of growth in emerging nations, the world is quickly becoming polluted. According to a study conducted by Cornell University, examining more than 120 published papers on the effects of population growth, malnutrition and various kinds of environmental degradation on human diseases, pollution has become the number one enemy of the population in many emerging nations, with air, water and soil pollution contributing to malnourishment, dieses and deaths to approximately 3.7 billion people.
According to the same study, air pollution from smoke and various chemicals kills three million people a year. Governments in emerging nations are now encouraging entrepreneurs to come up with ways to reduce carbon emissions and carbon footprints, often working even as venture capital partners through their state-owned investment funds. Such cooperation from the governments, we believe, may enable the Company to expand our planned operations to several emerging nations.
Business, Opportunity- Energy and Retail Division
According to the EIA, NG represents 24% of the energy consumed in the USA. They project that the percentage of NG usage will increase to approximately 28% by 2020, and in the event the United States adopts Kyoto Protocol’s (an international agreement linked to the United Nations Framework Convention on Climate Change, which commits its parties by setting internationally binding emission reduction targets) requirements to reduce carbon by 7% from their 1990 levels by 2012, the EIA projects that in 2020 that usage percentage could be between 6-10% higher in the United States alone.
According to the EIA, these increases are projected because the emission of greenhouse gases is much lower with the consumption of NG relative to other fossil fuel consumption because of, among others, the following reasons:
| | |
| ·
| NG, when burned, omits lower quantities of greenhouse gases and other pollutants;
|
| | |
| ·
| NG is more easily fully combusted and NG contains fewer impurities than any other fossil fuel;
|
| | |
| ·
| The amount of carbon dioxide produced for an equivalent amount of heat production is the least with NG as opposed to other fossil fuels;
|
| | |
| ·
| NG cannot result in a toxic spill and thus has major advantages related to transportation; and
|
| | |
| ·
| NG production costs are lower than alternative energy production.
|
The automotive industry could potentially take a giant step forward to reduce air-pollution and lower energy costs globally by using NG, and further, will provide the Company and companies like ours the opportunity to fulfill the potential growth in demand of NG.
Operating Strategy- Energy and Retail Division
25
The Company plans to construct, or acquire and expand, combined gasoline and NG fueling stations, and vehicle conversion factories and manage those stations through our in-house management team as part of our operating strategy as we begin our business. We plan to franchise some of our fueling stations along with vehicle conversion garages to qualified franchisees who we will train to manage those locations. We also plan to acquire existing gasoline stations that we plan to expand to include NG fueling bays and vehicle conversion garages. The Company has divided the planned structure of its operations into six divisions, as follows:
| | |
| (1)
| Self-constructed gasoline and CNG/LNG Fueling Stations;
|
| | |
| (2)
| Self-constructed Vehicle Conversion factories;
|
| | |
| (3)
| Franchised gasoline and CNG/LNG fueling stations;
|
| | |
| (4)
| Franchised vehicle conversion factories; and
|
| | |
| (5)
| Acquired fueling/service stations expanded to sell NG.
|
Government Regulation
In the United States, vehicle conversion is regulated by the EPA that adds to the cost of conversion process. We contacted a consulting firm who specialize in clearing EPA inspections and certifications for converted vehicles and conversion kits and plan to engage these entities to provide us those services. We will further pursue these discussions only if we decided to get back with our strategy to convert vehicles that will depend on the future trends in the NG business.
Why Natural Gas?
NG, in the most widely used sense, refers to the hydrocarbon-rich combustible gas stored in the deeper layer of Earth’s stratum, as opposed to oilfield-associated gas, of the NG family coexisting with petroleum. NG has transformed from organic matters hundreds of millions years ago. NG’s main component is methane and depending on the difference in the geological forming conditions, contains different amounts of low-carbon alkane like ethane, propane, butane, pentane, hexane and carbon dioxide, nitrogen, hydrogen sulfide. NG has been an important energy source, widely used in domestic and industrial areas.
NG in a gaseous state under atmospheric pressure will turn into CNG and to a liquid state when being cooled to make LNG. Compared with gaseous-state NG, CNG/LNG is more energy-concentrated and also can significantly reduce space and costs needed in storage and transportation. As a clean and efficient energy, LNG has been increasingly favored by many countries as a primary energy source.
According to the EIA, Global dry natural gas production increased between 110% between 1980 and 2010, from 53 trillion cubic feet (Tcf) in 1980 to 112 Tcf in 2010.
Many countries have realized CNG/LNG’s importance in diversifying energy sources and improving energy consumption structure, and according to EIA, the number of CNG/LNG fueling stations built in Japan, the United States, Korea and Europe are expanding rapidly. Multinational petroleum companies also have begun setting up CNG/LNG stations as part of their expansion strategy.
According to the EIA, NG is the world’s fastest-growing fuel, with consumption increasing from 113 trillion cubic feet (Tcf) in 2010, to 185 Tcf in 2040. NG continues to be favored as an environmental alternative compared with other hydrocarbon fuels. It is the fuel of choice by industries in part because of its lower carbon intensity compared with coal and oil. Consequently, it also has become the favored fuel by nations who are implementing policies to reduce greenhouse gas emissions. In addition the relative low cost and favorable heat rates for NG generation makes NG as an alternative fuel even more attractive for the user.
The EIA also estimates that, within in the United States, there are technically recoverable resources of 7,299 trillion cubic feet of world shale gas resources. More than half of the identified shale oil resources outside the United States are concentrated in four countries: Russia, China, Argentina and Libya; while more than half of the non-U.S. shale gas resources are concentrated in five countries: China, Argentina, Algeria, Canada and Mexico. The United States is ranked second after Russia for shale oil resources and fourth after Algeria for shale gas resources when compared with the 41 countries assessed (see Tables 1 & 2).
Principal Products, Services
Table 1. Top 10 countries with technically recoverable shale oil resources | | | | | |
Rank | | Country | | Shale oil (billion barrels) |
1 | | Russia | | 75 | |
2 | | U.S.1 | | 58 | (48) |
3 | | China | | 32 | |
4 | | Argentina | | 27 | |
5 | | Libya | | 26 | |
6 | | Australia | | 18 | |
7 | | Venezuela | | 13 | |
8 | | Mexico | | 13 | |
9 | | Pakistan | | 9 | |
10 | | Canada | | 9 | |
| | World Total | | 345 | (335) |
1 EIA estimates used for ranking order. ARI estimates in parentheses.
Table 2. Top 10 countries with technically recoverable shale gas resources
| | | | | |
Rank | | Country | | Shale gas (trillion cubic feet) |
1 | | China | | 1,115 | |
2 | | Argentina | | 802 | |
3 | | Algeria | | 707 | |
4 | | U.S.1 | | 665 | (1,161) |
5 | | Canada | | 573 | |
6 | | Mexico | | 545 | |
7 | | Australia | | 437 | |
8 | | South Africa | | 390 | |
9 | | Russia | | 285 | |
10 | | Brazil | | 245 | |
| | World Total | | 7,299 | (7,795) |
1 EIA estimates used for ranking order. ARI estimates in parentheses.
With the demand for NG increasing and with the supply of NG being abundant, the Company believes that the market for NG vehicles will rapidly expand in the near future.
Economic Factor—NG vs. Gasoline and Diesel
The following factors, according to Reuters, are driving up the demand for LNG vehicles:
| | |
| ·
| Recent global discoveries of massive shale gas reserves (China is the largest reserve in the world), along with more innovative drilling techniques. However, more infrastructures are necessary to utilize the increased supply; and
|
| | |
| ·
| China will embark on a bold strategy to encourage auto companies to manufacture at least 1.5 million NG-powered vehicles in the country by 2015. If this turns into reality, China could transform into the world’s largest market for NG automobiles. LNG vehicles can reduce carbon emissions, since it’s a cleaner and cheaper burning fuel.
|
The Benefits of Using Liquefied Natural Gas as a Diesel Alternative
| | |
| ·
| Lower Fuel Cost: Conversion cost can be paid back over a short period (Truck conversion cost $10,000);
|
| | |
| ·
| Lower Noise Levels: Much quieter than normal diesel engines; and
|
| | |
| ·
| Lower Emissions: LNG has lower greenhouse gas and particulate emissions compared with diesel.
|
Governments of emerging nations, such as the Chinese government, are doing all it can to encourage entrepreneurs to come up with ways to reduce carbon emissions and carbon footprints, often working as venture capital partners through their state-owned investment funds. City governments in China have implemented policies to encourage the industrialization of CNG passenger cars, LNG heavy-duty trucks and engines, LPG engines and direct-injection LNG engines.
27
Since the central government began to implement NG policies in pilot cities across the country, China has developed a domestic industry for NG products.
The following are examples of benefits to retail consumer in the United States and in Japan, to using NG as opposed to gasoline. These are approximate comparisons as many variables, including the model of the vehicles being measured, are factored into these comparisons.
Illustrative Cost/Benefit of NG vs. Alternative Fuel Usage in USA
As published by the Los Angeles Times On Line Web in a 2011 article entitled “Natural Gas Powered Ford Taxis Start Rolling in Orange County,” Tim Conlon, the president and general manager of California Yellow Cab, pointed out that in Orange County, California, the per gallon equivalent of CNG is almost $2 less than the price of a gallon of traditional fuel. Mr. Conlon believed that such savings added to the increased infrastructure support, made it a clear choice for his company to go with the CNG-powered Transit Connect Taxis.
Illustrative Cost/Benefit of NG vs. Alternative Fuel Usage in Japan
In Japan, in February 2010, HANA Engineering, a Japanese company in the business of making conversion kits to convert petroleum based cars to run on NG, fitted a Honda Civic with proper engine parts to run on gasoline and then on LPG (Liquid Petroleum Gas) and on CNG and came up with the following findings:
They filled the gas tank with $100.00 worth of gasoline and drove the Honda Civic for an “X” number of miles and then ran the same distance using LPG and CNG. They reported that the same distance can be run for $40.00 with CNG. The same distance can be run with LPG for a cost of $70.42.
Comparing CNG with LPG, they discovered the distance $100 worth of LPG can run be run for $57.80 with CNG.
Safety Factor
LNG is safer than petrol or diesel since LNG combustion point is about 650 centigrade while about 260 degrees C for diesel and petrol.
Current and Trend in Future NG prices
Although China has the biggest NG reserves underground, due to lack of ability to exploit them to keep up with the unanticipated demand caused by recent market reforms, China has been importing NG from other nations mainly from North America and Australia where they have superior techniques to exploit their reserves. Once China begins to extract their own NG for domestic use, we believe, the NG prices may go down further in the global market.
Growth in NG as a Transportation Fuel
According to the Natural Gas Vehicles for America, NG as a transportation fuel has seen significant growth, including the following notable items:
| | |
| ·
| Currently, transit vehicles (buses, taxis, airport shuttles) are the largest users of NG;
|
| | |
| ·
| The fastest growing NG vehicle (NGV) segment is waste collection and transfer vehicles; and
|
| | |
| ·
| NGV Global, the international NGV body, estimates there will be more than 50 million NG vehicles worldwide within the next ten years, or about 9% of the world transportation fleets.
|
Five-Year Growth Strategy- Energy and Retail Division
We will use part of the funds received to acquire land and building housing a gasoline service station to first collect rental income and then negotiate to buy the business. We plan to use that as our model and the base to market and expand our operation by constructing Operational Units to be financed by further equity and bond offerings (for which there is no assurance). Additional strategies include:
| | |
| (1)
| Aggressively look for potentially ideal locations to set up new fueling and service stations along with vehicle conversion garages throughout the United States;
|
28
| | |
| (2)
| Acquisition of exiting gas service stations to add CNG/LNG bays, offering a combination of both;
|
| | |
| (3)
| Generate revenue through franchising fees for CNG/LNG fueling/service stations;
|
| | |
| (4)
| Build conversion plants to convert NG to CNG/LNG, contiguous with CNG/LNG fueling/service stations (1 LNG conversion plant for 20 stations); and
|
| | |
| (5)
| Expand business model to emerging growth countries.
|
Tax Incentives and Government Grants
There are numerous U.S. federal and state government tax incentives, laws and regulations and programs and grants available to promote purchase and use of NG vehicles and sale of NG as alternative fuel. Incentives are typically available to offset the cost of acquiring NG vehicles or converting vehicles to use NG, constructing NG fueling stations and selling CNG or LNG.
Competition- Energy and Retail Division
The market for vehicular fuels is highly competitive. The biggest competition for CNG, LNG and other alternative fuels is gasoline and diesel fuel, the production, distribution and sale of which are dominated by large integrated oil companies. The vast majority of vehicles in the United States are powered by gasoline or diesel fuel. There is no assurance that we can compete effectively against other fuels, or that significant, more resourceful competitors will not enter the NG fuel market.
Within the United States, we believe the largest enterprises engaged in CNG sales are: (i) Trillium USA/Pinnacle CNG, a privately held provider of CNG fuel infrastructure and fueling services, which focuses primarily on transit fleets in California, Arizona and New York, and (ii) Hanover Compressor Company, a large publicly-traded international provider of NG compressors and related equipment, which focuses its CNG vehicle fuel business primarily on transit fleets in California, Maryland, Massachusetts and Washington D.C. These companies are significant competitors in the market for transit fleets.
Within the U.S. LNG market, one of the largest competitors is Earth Biofuels, Inc., a public company that distributes LNG in the western United States. Another major competitor, Clean Energy Fuels Corporation, is one of the biggest natural gas fuel station owners and operators in the United States. They own, operate or supply over 300 CNG and LNG fueling stations. In addition, potential entrants to the market for natural gas vehicle fuels include the large integrated oil companies, other retail gasoline marketers and natural gas utility companies. The integrated oil companies produce and sell crude oil and natural gas, and they refine crude oil into gasoline and diesel. They and other retail gasoline marketers own and franchise retail stations that sell gasoline and diesel fuel. In international markets integrated oil companies and other established fueling companies sell CNG at a number of their vehicle fueling stations that sell gasoline and diesel. Natural gas utility companies own and operate the local pipeline infrastructure that supplies natural gas to retail, commercial and industrial customers.
In addition, potential entrants to the market for NG vehicle fuels include the large integrated oil companies, other retail gasoline marketers and natural gas utility companies. The integrated oil companies produce and sell crude oil and NG, and they refine crude oil into gasoline and diesel fuels. They and other retail gasoline marketers own and franchise retail stations that sell gasoline and diesel fuel. In international markets, integrated oil companies and other established fueling companies sell CNG at a number of their vehicle fueling stations that sell gasoline and diesel. NG utility companies own and operate the local pipeline infrastructure that supplies NG to retail, commercial and industrial customers.
Our vehicle conversion business will face, significant competition, including from incumbent technologies, and in particular increased competition with respect to spark-ignited NG engine original equipment manufacturers in China and aftermarket kit providers in Europe. As the market for NG engine products continues to grow this competition may increase. New developments in technology may negatively affect the development or sale of some or all of our products or make our products uncompetitive or obsolete. Other companies, many of which have substantially greater customer bases, businesses and financial and other resources than us, are currently engaged in the development of products and technologies that are similar to, or may be competitive with, certain of our products and technologies.
Each of our target markets in vehicle conversion is currently serviced by existing manufacturers with existing customers and suppliers using proven and widely accepted technologies. Many existing manufacturers have or had NG engine programs and could develop new engines without our help or components, using more conventional technologies or technologies from competitive companies. Currently, Westport Innovations Inc. (“Westport”) is the leading manufacturer of low-emission engine and fuel system technologies utilizing gaseous fuels. Its technology and products enable light, medium, heavy-duty and high horsepower petroleum-based fuel engines to use primarily NG and alternative fuels. Westport’s technology and products enable light (less than 5.9 litre), medium (5.9 to 8.9 litre), heavy-duty (11 to 16 litre) and high-horsepower (greater than 16 litre) petroleum-based fuel engines to use primarily NG,
29
giving users a cleaner and generally less expensive alternative fuel based on a more abundant natural resource. Through their partnerships and direct sales efforts, they sell a large number of NG and propane engines and fuel systems to customers in various nations. Westport also has strategic relationships with the world’s top four engine producers or has strategic relationships with the world’s top truck producers, as well as the world’s top automotive manufacturers. Westport may get into converting the used vehicles to run on NG using their superior technology and capital and may make the small start-up companies such as us competing to convert used vehicles to run on NG no longer profitable to operate.
It is possible that any of these current competitors, in any of our divisions of operation, and other competitors who may enter the market in the future, may create product and service offerings that will make it impossible for us to capture any market segment. Many of these companies have far greater financial and other resources and name recognition than us. Entry or expansion by these companies into the market segment we target for NG vehicle fuels and vehicle conversion may reduce our profit margins, limit our customer base and restrict our expansion opportunities.
Background on Clean Air Regulation
Federal Clean Air Act – The Federal Clean Air Act provides a comprehensive framework for air quality regulation in the United States. Many of the federal, state and local air pollution control programs regulating vehicles and stationary sources have their basis in Title I or Title II of the Federal Clean Air Act.
Title I of the Federal Clean Air Act charges the EPA with establishing uniform “National Ambient Air Quality Standards” for criteria air pollutants anticipated to endanger public health and welfare. States in turn have the primary responsibility under the Federal Clean Air Act for meeting these standards. If any area within a particular state fails to meet these standards for a criteria air pollutant, the state must develop an implementation plan and local agencies must develop air quality management plans for achieving these standards. Many state programs regulating stationary source emissions, vehicle pollution or mobile sources of pollution are developed as part of a state implementation plan. For mobile sources, two criteria pollutants in particular are of concern: ozone and particulate matter. As components of state implementation plans, individual states have also adopted diesel fuel standards intended to reduce nitric oxide and nitrogen dioxide (collectively, “NOx”)and particulate matter emissions. Texas and California, for example, have both adopted low-NOx diesel programs. Additionally, many state implementation plans and some quality management plans include vehicle fleet requirements specifying the use of low emission or alternative fuels in government vehicles.
Title II of the Federal Clean Air Act authorizes the EPA to establish emission standards for vehicles and engines. Diesel fueled heavy duty trucks and buses have recently accounted for substantial portions of NOx and particulate matter emissions from mobile sources, and diesel emissions have received significant attention from environmental groups and state agencies. Further, the 2007 Highway Rule seeks to limit emissions from diesel fueled trucks and buses on two fronts: new tailpipe standards requiring significantly reduced NOx and particulate matter emissions for new heavy duty diesel engines, and new standards requiring refiners to produce low sulfur diesel fuels that will enable more extensive use of advanced pollution control technologies on diesel engines.
The 2007 Highway Rule’s tailpipe standards apply to new diesel engines. Specifically, new particulate matter standards took effect in the model year 2007 and new NOx standards were phased in between 2007 and 2010. The rule’s fuel standards call for a shift by US refiners and importers from low sulfur diesel, with a sulfur content of 500 parts per million (ppm), to ultra-low sulfur diesel, with a sulfur content of 15 ppm. The rule, which effects a transition to ultra-low sulfur diesel, required refiners to begin producing ultra-low sulfur diesel fuels on June 1, 2006.
Although the majority of state air pollution control regulations are components of state implementation plans developed pursuant to Title I of the Federal Clean Air Act, states are not precluded from developing their own air pollution control programs under state law. For example, the California Air Resources Board and the South Coast Air Quality Management District have promulgated a series of airborne toxic control measures under California law, several of which are directed toward reducing emissions from diesel fueled engines.
Although the federal government has not adopted any laws that comprehensively regulate greenhouse gas emissions, the EPA is developing regulations that would regulate these pollutants under the Clean Air Act.
Government Regulation and Environmental Matters
Many aspects of our operations are subject to regulation under federal, state, local and foreign laws. If we were to violate any of these laws or if the laws or enforcement proceedings were to change, it could have a material adverse effect on our business, financial condition and results of operations. Certain regulations that significantly impact our operations are described below:
CNG and LNG stations – to construct a CNG or LNG fueling station, we must obtain a facility permit from the local fire department and either we or a third party contractor must be licensed as a general engineering contractor. The installation of each CNG and LNG
30
fueling station must be in accordance with federal, state and local regulations pertaining to station design, environmental health, accidental release prevention, above-ground storage tanks, hazardous waste and hazardous materials. We are also required to register with certain state agencies as a retailer/wholesalerlow-cost producer of CNG and LNG.
Transfer of LNG – Federal Safety Standards require each transfer of LNG to be conductedprimarily high-quality, metallurgical coal in accordance with specific written safety procedures. These procedures must be located at each place of transfer and must include provisions for personnel to be in constant attendance during all LNG transfer operations.
Plan for Distribution Methods of the Products and Services
We plan to begin with a smaller gasoline station with a convenience store that we wish to expand to include NG and also a garage to service vehicles that we may use to convert vehicles to run on NG if we see the trend towards consumers switching to NG. At the early stage we anticipate our revenue to come mostly from gasoline and retail sales. As we expand our Energy and Retail Division we may decide to expand synergistic services.
Healthcare Division
As part of our change in our strategy, adopted in February 2015, the Company acquired 55% of ECI-LATAM Inc. (“ECIL”). Began by an entrepreneur Goran Antic, ECIL was incorporated in the State of Florida on March 25, 2014 and is engaged in installation and performing maintenance and repairs of large medical equipment that deal in sterilization and disinfection. ECIL also sells spare parts, consumables and service contracts for medical establishments. As of now 100% of ECIL sales and services are performed outside the USA. Also 100% of the maintenance and repairs for the period of these financial statements have been done only for the medical equipment belonging to Getinge Group, a public company based in Sweden who manufactures and distributes their own large medical equipment. Currently Mr. Antic is the sole employee of ECIL and acts as its Chief Executive Officer and Chairman of the Board.
In May 2015 ECIL set up an “Animal Health Division,” to manufacture, package, market and distribute globally, an infection healing cream made of natural products for dairy animals in joint venture with a group of people in Serbia who, according to them, use a homemade cream to treat dairy animal suffering from mastitis and udder edema.
In August 2015, this Animal Health Division was transferred to a separate corporation incorporated in the state of Florida entitled La Veles Inc. (“LVI”) with Mr. Antic acting as the Chief Executive Officer of La Veles Inc. However, after further discussions we have decided not to get involved with production of the infection-curing Cream but allow the group in Serbia to manufacture, package with our Company, most probably through ECI, focus only on distribution of such natural cream and also look to distribute similar natural creams being produced by other producers in the world.
In October 2015, we came across a group of scientists dealing in Cell Therapy for cancer who began discussions with us to join our holding company as a subsidiary. We attended an industry event (SITC 2015) and came across number of entities with huge promise, we believe we may be able to acquire once we have raised enough capital. We believe this is a cutting edge industry with enough major investment bankers seeking to invest in the next break-through company and thus may create our stockholders good opportunities to increase their stock value.
The Market for our Installation and Maintenance of Medical Equipment
Most major manufacturers and vendors of major medical equipment install the equipment on their own. Some vendors continue to maintain and repair the equipment going forward and some outsource them. Our subsidiary ECIL is one of the companies being outsourced the maintenance work by a major medical equipment manufacturer. We have come across similar companies to ours that serve major vendors on various brands in a similar manner. We believe most such companies make about a million dollars and being operated by one or two skilled persons.
Sources of Revenue- Healthcare Division
Currently we make our revenue mostly from one customer in a Caribbean nation that uses medical equipment from the Swedish manufacturer Getinge Group.
Capital Requirements- Healthcare Division
Currently we collect all our invoices to install and maintain medical equipment in advance and thus do not need any additional capital for the operation of ECIL. However, to increase the market share of ECIL we have targeted acquisitions of similar companies that maintain medical equipment sold by other vendors such as Steris and Tuttnaur who are competitors of Getinge Group. We believe we
31
can acquire a smaller company similar to ECIL for about a million dollars to further expand ECIL operation through synergistic diversification.
Future Trends- Healthcare Division
As the baby boom generation is getting older we expect to have more hospitals and healthcare service to install the latest equipment and then require constant maintenance of those. We believe this trend will continue and that will generate enough business for ECIL.
Business Opportunity- Healthcare Division
We plan to widen our sales of accessories and consumables to customers who will hire us to maintain their equipment.
Operating Strategy- Healthcare Division
Our current strategy is to continue to work with our major customer, who pays us in advance for services that we provide and continue with our marketing to find more similar customers.
Five-Year Growth Strategy- Healthcare Division
We believe our healthcare division as it currently runs, is profitable but will not have the potential to grow significantly since most major medical equipment manufacturers have their own departments installing and maintaining their equipment. We began talking with a few start-ups in Cell Therapy as cure for cancer to look as potential businesses to acquire although we have not made any constructive agreements with any of them. We also have met with a few other companies in the healthcare industry and in the next few years plan to aggressively look for businesses who may desire to operate under the structure of a public company to join us.
Competition-Healthcare Division
ECI-LATAM Inc. is the first subsidiary under our healthcare division. ECIL deals in maintaining large medical equipment that deals in sterilization and disinfection. ECIL also sells spare parts, consumables and service contracts for medical establishments. As of now 100% of ECIL sales and services are performed outside the USA. Also 100% of the maintenance and repairs for the period the financial statements reflect have been done only for the medical equipment belonging to Getinge Group, a public company based in Sweden who manufacture and distribute their own large medical equipment. Getinge Group faces major competition from other major manufacturers on similar medical equipment and if our limited clients chose to use any other machine than the Getinge equipment then we may lose the limited clients ECIL currently has.
We formed La Veles Inc., to manufacture, package and distribute naturally made products to treat dairy animal suffering from mastitis and udder edema in joint venture with a group in Serbia by setting up a factory in Serbia. As mentioned elsewhere in this report after further discussions we have decided not to get involved with production of the infection curing Cream but allow the group in Serbia to manufacture and package the Cream with our Company, most probably through ECI, focus only on distribution of such natural cream and also look to distribute similar natural creams being produced by other producers in the world. Due to this development La Veles Inc. will remain a non-operating company until we decided on any plans for La Veles Inc.
Government Regulation and Environmental Matters
Our healthcare subsidiary ECIL does all its work overseas and does work for other medical establishment and follow the guidelines of they provide to him depending on where he performs services.
Distribution Methods of the Products and Services
We have a major customer that uses medical equipment manufactured by Getinge Group that pays us regular fees to maintain their machines plus acquire accessories. Also we have other customers who regularly buy accessories from us. When they need our services they send us a purchase order and we collect our fees in advance before we place our orders and/or begin our services.
ECIL plans to distribute the infection healing cream that we have mentioned. We plan to investigate two different routes to market.
The first route to market is to pair with an existing animal health specialist, who already has other treatments in the market for Mastitis. We believe that this would be the most cost effective route to market as the key relationships and distribution channels for existing antibiotic or alternative treatments will already be in place. The other way is to distribute through a currently established distributor. One of such distributors that we have already met with and discussed such an arrangement is Agrilac Dairy Technology, based in Miami, Florida.
32
So far we have not begun any distribution or we have any plans to begin distribution any time soon but if we did that, then in the future, we will further assess which distribution method is appropriate for each of the markets we target for the distribution of the infection healing cream. At present, we believe that there is not a single distribution method that is fit for the purpose of entering all geographical markets that we would look to enter. As of now ECIL does not have a formal agreement to distribute this cream with the creator of the Cream. We plan to sign a formal agreement prior to beginning any distribution of this Cream since thus far we have not signed any agreements with the manufacturer of the cream.
Consulting Division
Since our main strategy is to find businesses with significant upside to merge with or acquire to expand our operation, buying an existing business with an experienced management team in place, we believe, is the most practical strategy. However, due to our size we can afford to buy only small businesses and often these small businesses do not keep proper accounting to put themselves through an audit under the SEC guidelines set forth by Public Accounting Oversight Board (PCAOB). We discovered that often it would cost too much money for a small business to hire an outside service to prepare their records acceptable enough to be audited by a PCAOB certified CPA firm under the guidelines set forth by PCAOB, precluding us from acquiring such companies due to not being able to audit them. Since we began searching for management teams to join us we found it more practical to acquire a company along with the management team to join as a wholly owned or majority owned subsidiary of our Company. That strategy requires us to get them audited under PCAOB guidelines since a company is required to go through such an audit before a public company such as ours can acquire them. Hence, since we began, our management team, especially the CEO Andrew Weeraratne (who has extensive experience as a CPA, CFO and as a consultant), have been spending long hours going through and making needed adjustments to bring financial statements to be in accordance with accounting standards and writing accounting and procedures for a few companies that we have considered potential acquisitions targets. These actions have led us to set up our own consulting division, whereby we will invoice the businesses who would request us to help them get their records ready for PCAOB audits with us collecting such fees in cash or in the event we agree to acquire them by reducing the purchase price by the amount of unpaid consulting service fees.
Our Consulting Division will focus on identifying and organizing currently operating businesses to set up their accounting system to run them efficiently with the help of accurate and timely financial and management reports. We also plan to implement internal control procedures that will safeguard their assets and accounting procedures that will make their operation efficient and transparent that in turn will help them in the event they choose to get listed on the public market through joining us or on their own in the future. We also plan to write operating and internal control procedure manuals and disclosure check list manuals that will help small business owners to prepare for expansion as they find the needed capital to expand. We believe that these services will provide us cash flow and also introduce us to businesses we believe we may be able to acquire in exchange for cash and stock of our company. We believe our current management team has necessary experience to guide small businesses to overcome their problems and build successful businesses. We have provided such consulting services to two companies.
Since we began in October 2013 till June 2014 when our original form S-1 we filed with the Security and Exchange Commission (SEC) to raise funds got effective, our operations have been limited to our organizational activities, early stage implementation of our business plan and focusing on filing the S-1 and related documents with the Security and Exchange Commission. Since June 2014 to-date we have been filing various applications and documents with various States of the USA and Post Effective Amendments with the Security and Exchange Commission. Also we have spent considerable time installing internal control and administrative procedures for our company, installing and learning software to edgarize, XBRL and filing the quarterly and annual financial statements with the SEC. In addition, we have spent considerable time seeking out businesses we can either buy 100% or the majority ownership to begin our operations. As of December 31, 2015, we have not been able to find any clients that we could invoice to receive any cash for such consulting work but we hope to begin collecting for such services in the future.
NGFC Limited Partnership
NGFC Limited Partnership (NGLP) located at 7135 Collins Ave, Miami Beach, FL 33141, in April of 2015, made an offering to raise a maximum of $1,000,000 pursuant to the private transaction exemption in Securities and Exchange Commission (“SEC”) Regulation D, Rule 506 giving the investors the option to convert 100% of their capital to shares of NGFC at 0.30 cents per share with that conversion feature expiring on March 31, 2017. The Partnership as of the current date has raised $535,350 from 14 limited Partners.
The main purpose of NGLP is to seek currently operating gas stations with convenience stores and garages to acquire and lease them to NGFC to operate and provide limited partners a fixed monthly payment through sharing the lease payments. However, until we raise enough funds to make such acquisitions, we will be investing some of its funds buying stocks, especially dividend paying stocks while hedging them to protect from any rapid downward swings.
Following is a summary of the terms of the Partnership Agreement:
·
The General Partner will not charge any management fee to manage the Partnership.
33
·
At the end of each calendar quarter the Partnership will calculate the Net Asset Value (NAV) and any excess of NAV will be distributed 70% to the Limited Partners and 30% to the General Partner.
·
Net Asset Value (NAV) of the Partnership means the Partnership's assets, at fair value(“marked to market”), less liabilities, including any accrued but unpaid expenses and reserves for certain circumstances. The “Net Asset Value per Interest” means the Net Asset Value of the Partnership divided by the number of Interests then outstanding. The term “marked to market” is an accounting term used to describe the adjustment of the valuation of a security or portfolio to reflect current market values. The Partnership will mark all positions, to market at the close of each quarterly trading period in order to calculate performance, taking into account both realized and unrealized profits and losses.
·
The Partnership will grant all Limited Partners the option to convert one hundred percent of the capital they have contributed to the Partnership to shares of the General Partner, NGFC Equities, Inc. at a strike price based on the market price of NGFC at the time limited partners make the capital contribution to be expired within a certain period.
·
Fiscal Year of the Partnership shall end on September 30th of each year (to coincide with the fiscal year of the General Partner), which fiscal year may be changed by the General Partner, in its sole and absolute discretion.
The Board of Directors, at a meeting held on May 19, 2016, approved NGFC to resign as the general partner of NGLP since in the event the investment by NGLP in public company stocks to be more than 40% of the total assets, that may require us to register NGFC under the Investment Company Act of 1940, that we would like to avoid since the purpose of NGFC is to acquire companies to operate through subsidiaries and not be a passive investor while it is more practical for NGLP to make a better return on the money NGLP is holding by investing in any alternative investments while NGLP still consider acquiring land and building that house operating gasoline stations to rent to Energy and Retail division of NGFC to get a fixed return on their money.
At the Board meeting held on May 19, 2016, following resolutions were approved:
1.
To appoint I. Andrew Weeraratne the CEO of NGFC as a general partner of NGLP and transfer the profit interest of NGFC to Mr. Weeraratne.
2.
To deconsolidate NGLP in filing future financial statements of NGFC.
3.
For NGFC to resign as general partner of NGFC.
4.
To keep the option the current Limited Partners of NGLP have as of May 20, 2016 to convert 100% of their capital to NGFC shares at $0.30 per shares by March 31, 2017 effective even after deconsolidation of NGLP. If this conversion feature was executed by all 14 limited partners then their total capital (if any of them did not withdraw prior to March 31, 2017) of $535,350 could be converted at $0.30 cents per share to 1,784,500 shares of Class A Common Stock of NGFC.
5.
Not to grant this option to convert limited partnership interest to shares of NGFC to any additional contributions to NGLP since NGFC is no longer will consolidate or will be the primary beneficiary of NGLP.
We filed a Form 8-K on May 20, 2016 announcing the above resolutions but later discovered that we made an error when NGFC resigned as general partner of NGLP without giving 30-days written notice to all limited partners as required by the NGLP Partnership Agreement, and therefore we filed an amended Form 8-K on July 11, 2016 withdrawing the resignation of NGFC as general partner. But since due to other resolutions approved and announced through that Form 8-k filed on May 20, 2015, were according to the partnership agreement, the deconsolidation of NGLP will go ahead as planned since as per Consolidation Topic 810 released on February 2015 by Financial Accounting Standard Board, being general partner of a partnership itself does not require the reporting person to consolidate the partnership. We plan to give the 30-days written notice to all limited partners the decision of NGFC to resign as general partner and then resign formally and file announcement with the SEC.
Since we consider this deconsolidation to be material, we have included pro forma information giving effect to our surrender of control over NGLP and its subsequent deconsolidation beginning Page No F-21 following the Financial Statements and have referred to that at various places in this prospectus.
Employees
As of December 31, 2015, we have three full time employees. We plan to hire additional full time employees upon completion of this offering.
DESCRIPTION OF PROPERTY
Our executive offices is located at 45, Almeria Avenue, Coral Gables, FL 33134 (Telephone Number 305-430-6103) that we use mostly for company meetings and sharing other services with our lesser Lynx Management paying lease of $200.00 per month for the use of conference facility and answering our phone by a receptionist. Most of the daily tasks by the management are done from their personal residences using the digital media.
LEGAL PROCEEDINGS
34
We are currently not involved in litigation that we believe will have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision is expected to have a material adverse effect.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) Market Information
We began trading out stock on the OTCPINK market under the stock symbol NGFF in November 2015. As of the filing date of this prospectus our total stock that have traded have been 2,750 and as such it is a stock with low liquidity. There is no assurance that our shares of Common Stock will have enough liquidity any time in the future.
(b) Holders
As of December 31, 2015, the Company had 127 shareholders of its Common Stock.
(c) Dividends
We have never paid cash dividends on our Common Stock. Payment of dividends will be within the sole discretion of our board of directors and will depend, among other factors, upon our earnings, capital requirements and our operating and financial condition. In addition, under Florida law, we may declare and pay dividends on our Common Stock either out of our surplus, as defined in the relevant Florida statutes, or if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. If, however, the capital of our company, computed in accordance with the relevant Florida statutes, has been diminished by depreciation in the value of our property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, we are prohibited from declaring and paying out of such net profits any dividends upon any shares of our capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired.
(d) Securities authorized for issuance under equity compensation plans
Not applicable.
OTCQB Listing
We began trading our stock on the OTCPINK starting November 2015 with the stock symbol NGFF. We got upgraded our listing to OTCQB on May 17, 2016. The OTCQB® Venture Market is for entrepreneurial and development stage U.S. and international companies. To be eligible, companies must be current in their reporting and undergo an annual verification and management certification process. These standards provide a strong baseline of transparency, as well as the technology and regulation to improve the information and trading experience for investors. Companies must meet a minimum $0.01 bid price test and may not be in bankruptcy.
SELECTED FINANCIAL DATA
The following summary financial data should be read in conjunction with the “Management’s Discussion and Analysis of Financial Statements and Results of Operations” and the Financial Statements and Notes thereto, included elsewhere in this prospectus.
| | | | | | |
| | from Inception | | |
Year Ended | October 2, 2013 to | Six Months Ended |
September 30,2015 | September 30,2014 | March 31,2016 |
| | | | | (Unaudited) |
Statement of Operations | | | | | | |
Revenues | $ | 62,429 | $ | - | $ | 144,862 |
Cost of Revenues | $ | 60,222 | $ | - | $ | 54,098 |
General and Administrative Expenses | $ | 113,915 | $ | 29,547 | $ | 26,420 |
Total Operating Expenses | $ | 407,093 | $ | 84,952 | $ | 121,042 |
Total Other Income | $ | (39,569) | $ | (3,978) | $ | 10,358 |
Less attributable to Non Controlling Interest | $ | 19,896 | $ | - | $ | (24,820) |
Net Income/(Loss) | $ | (424,559) | $ | (88,930) | $ | (44,740) |
| | | | | | |
| As of | As of | As of |
September 31, 2015 | September 31, 2014 | March 31, 2016 |
| | | | | (Unaudited) |
Balance Sheet Data | | | | | | |
Cash & Cash Equivalent | $ | 444,775 | $ | 82,819 | $ | 394,298 |
Marketable Securities | $ | 195,461 | $ | 27,561 | $ | 242,801 |
Total Assets | $ | 1,130,269 | $ | 110,380 | $ | 1,103,057 |
Total Liabilities | $ | 68,094 | $ | 3,000 | $ | 4,784 |
Stockholders’ Equity | $ | 1,062,175 | $ | 107,380 | $ | 1,098,273 |
Liabilities & SH Equity | $ | 1,130,269 | $ | 110,380 | $ | 1,103,057 |
FINANCIAL STATEMENTS—See Statements at the end of this registration statement.
Following is the breakdown of Statement of Operations by Divisions:
| | | | | | | |
Energy and Retail Division | | | | | | |
| | from Inception | | |
Year Ended | October 2, 2013 to | Six Months Ended |
September 30, 2015 | September 30, 2014 | March 31,2016 |
| | | | | (Unaudited) |
Statement of Operations | | | | | | |
Revenues | $ | - | $ | - | $ | 4,393 |
Cost of Revenues | $ | - | $ | - | $ | - |
General and Administrative Expenses | $ | 106,253 | $ | 29,548 | $ | 17,195 |
Total Operating Expenses | $ | 369,662 | $ | 84,952 | $ | 92,180 |
Total Other Income | $ | (21,011) | $ | (3,978) | $ | 9,562 |
Less attributable to Non Controlling Interest | $ | 19,896 | $ | - | $ | (24,820) |
Net Income/(Loss) | $ | (370,777) | $ | (88,930) | $ | (103,045) |
| | | | |
Healthcare Division | | | | |
| from Inception | | |
March 1, 2015 to | Six Months Ended |
September 30,2015 | March 31,2016 |
| | | (Unaudited) |
Statement of Operations | | | | |
Revenues | $ | 62,429 | $ | 140,469 |
Cost of Revenues | $ | 60,222 | $ | 54,098 |
General and Administrative Expenses | $ | 7,261 | $ | 8,425 |
Total Operating Expenses | $ | 34,530 | $ | 28,062 |
Total Other Income | $ | - | $ | - |
Less attributable to Non Controlling Interest | $ | - | $ | - |
Net Income/(Loss) | $ | (32,323) | $ | 58,309 |
| | | | |
NGFC Limited Partnership | | | | |
| from Inception | | |
March 24, 2015 to | Six Months Ended |
September 30,2015 | March 31,2016 |
| | | (Unaudited) |
Statement of Operations | | | | |
Revenues | $ | - | $ | - |
Cost of Revenues | $ | - | $ | - |
General and Administrative Expenses | $ | 401 | $ | 800 |
Total Operating Expenses | $ | 2,901 | $ | 800 |
Total Other Income | $ | (18,558) | $ | 796 |
Less attributable to Non Controlling Interest | $ | - | $ | - |
Net Income/(Loss) | $ | (21,459) | $ | (4) |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS REGISTRATION STATEMENT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE RISKS AND OTHER FACTORS INCLUDE, AMONG OTHERS, THOSE LISTED UNDER “FORWARD-LOOKING STATEMENTS” AND “RISK FACTORS” AND THOSE INCLUDED ELSEWHERE IN THIS REGISTRATION STATEMENT.
Overview
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. Since inception,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 has been engaged in organizational efforts and obtaining initial financing. When we formed ourQuest Energy Inc., a private company our focus was to (i) construct and/or purchase and manage a chain of combined gasoline, diesel and natural gas (NG) fueling and service stations (initially, in the Miami, FL area); (ii) construct conversion factories to convert NG to liquefied natural gas (LNG) and compressed natural gas (CNG); and (iii) construct conversion factories to retrofit vehicles currently using gasoline or diesel fuel to also run on NG in the United States and also to build a convenience store to serve our customers in each of our locations. We define each of such combined stations an “Operational Unit.”
At a Board of Directors meeting held on February 16, 2015, the Company chose to diversify its operations by adding two additional divisions to its original business strategy to set up three divisions as follows:
1.
Energy and Retail Division
2.
Healthcare Division
3.
Consulting Division
As we have indicated in the Schedule 14C Information that we filed with the Security and Exchange Commission on January 26, 2015, we received our stockholder approval to change the name of our Company from “Natural Gas Fueling and Conversion Inc.” to “NGFC Equities Inc.” to better reflect our strategy of diversification.
37
As mentioned above, when we began we were planning to construct, own and operate factories to convert NG from its gaseous state to LNG (through a process of cooling NG) to be distributed to our own fueling stations and also to fueling stations owned by other independent owners and companies. However, due to the current decline of prices in energy, we do not believe it would be viable for us to continue with this strategy and thus we plan to hold off our plans on that.
Also when we began our business in late 2013, we were planning to operate a vehicle conversion business through a joint venture relationship with Shenzhen HJ Technology Company Ltd. (“HJT”), which is currently operating a series of factories converting vehicles to operate on LNG and CNG in the Peoples’ Republic of China (“PRC” or “China”), using its patented Gas Intelligent Electric Control System (GIECS) technology. Since then we have come across a few other conversion kits from other manufacturers and looked into using other conversion kits in our planned vehicle conversion division. However, due to current decline in price of gasoline, we feel the vehicle conversion business may no longer be profitable and thus plan to hold off on that strategy as well.
The reason for the change in our business strategy came about through many meetings we had with various business owners both in the energy and retail sectors (where our original focus was) and also in other business sectors. After we began our Company, we came across owners of various businesses with promising upside potential who showed an interest in joining us under the transparency of our public company platform with us providing administrative tasks with those business owners continuing to operate their business that lead to our diversification strategy to operate profitable businesses in industries other than the energy and retail industry, mostly through subsidiaries that will be managed by experienced operators with our company providing administrative assistance as the majority or 100% owner while continuing to focus on our original concept of setting up “Operating Units” in the energy sector as we get the funding to do so.
As part of this change in our strategy, the Company acquired 55% of ECI-LATAM INC. (“ECIL”) that was incorporated in the State of FloridaIndiana 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 25, 20142017. 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 five 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”), and Quest Processing LLC (“Quest Processing”), all of which are located in eastern Kentucky 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.
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 $65.88 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 engagedcurrently 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 installationpreparation for production, changing working sections within the underground mine, air ventilation enhancements primarily through brattice work, and performing maintenanceinstalling 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 repairssold the coal at an average price of large medical equipment that deal in sterilization and disinfection. ECIL also sells spare parts, consumables and service contracts for medical establishments. As of now 100% of ECIL sales and services are performed outside the USA. Also$65.88. During 2017, 100% of the maintenancecoal 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.
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:
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.
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:
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.
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:
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.
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.
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.
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 June 30, 2018 and 2017 100% and 100% of outstanding accounts receivable came from two and two customers, respectively. As of June 30, 2018, and 2017 91% and 77% of revenue came from three and three 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 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 periodCompany’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. LRR is considered a variable interest entity and is consolidated into Quest Energy’s financial statements.
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 financial statementsfederal 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 done onlypromulgated. 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 medical equipment belongingextent 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 Getinge Group,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.
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 will become effective in January 2017. The rule will impact both surface and underground mining operations, as it will impose stricter guidelines on conducting coal mining operations, and will require more extensive baseline data on hydrology, geology and aquatic biology in permit applications. The rule will also require 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. If the final rule survives judicial review or further legislative action and takes effect, our mining operations could face significant operating restrictions, as well as increased monitoring and restoration costs. Other potential restrictions apply to mining activities on properties that are within the designated boundary of federally protected lands or national forests, or in the vicinity of public
company basedroads. These existing and proposed rules, or other new SMCRA regulations, could result in
Sweden who manufactureadditional material costs, obligations and
distribute their own large medical equipment.
In May 2015 ECIL set up an “Animal Health Division,”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 manufacture, package, marketrestore unreclaimed and distribute globally, an infection healing creamabandoned mine lands mined before 1977. The current per ton fee is $0.280 per ton for dairy animals. In August 2015, this Animal Health Division was transferredsurface 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 separate corporation incorporatedformal 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.
Financial Assurance
Federal and state laws require a mine operator to secure the performance of Florida entitled La Veles Inc. (“LVI”) with NGFC owning 73%its reclamation and lease obligations under SMCRA through the use of LVI. La Veles was planning on setting up a factorysurety 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 Republicmarket for coal used to generate electricity in recent years have led to bankruptcies involving prominent coal producers. Several of Serbiathese companies relied on self-bonding to manufacture this cream with Mr. Antic, whoguarantee 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 fluentintended 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 Serbian language, acting asAugust 2016 that it would initiate a rulemaking under SMCRA to revise the Chief Executive Officerrequirements for self-bonding. Individually and collectively, these revised various financial assurance requirements may increase the amount of La Veles Inc. However,financial assurance needed and limit the activationtypes of this strategy did not proceed smoothlyacceptable 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 saveobtain 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, 2017 and June 30, 2018, we had outstanding surety bonds at all of our mining operations totaling approximately $25.38 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 cost,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 Boardminers 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 January 23rd,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, decidedthe 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 involvedretired, 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.
●
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.
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 distributionfuture 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.
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 anti-infection creamrule. The U.S. Court of Appeals for the Sixth Circuit stayed the rule nationwide pending the outcome of this litigation. 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 let ECILaddresses 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.
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 handleor 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.
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 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 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 through ECILcompleted on our material properties.
We have not classified, and not get La Veles Inc. be involved with it. As of now ECIL doesas a result, do not have any formal agreement“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 distribute this Cream. Paragraph (a) (4) of Industry Guide 7.
LEGAL PROCEEDINGS
From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to, and our property is not subject to, any material legal proceedings.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Currently
LVI remains an inactive 100% owned subsidiary of NGFC. The cost of setting up LVI and making it inactive had been minimal to us due towe are trading on the
expertise of our staff in handling most administrative and filing obligations through our internal team.
In March 2015, we formed NGFC Limited Partnership (“NGLP” “the Partnership”) with NGFC Equities, Inc. as the General Partner. One of the purposes of the Partnership is to raise funds in the private market to acquire gasoline stations that the Partnership would lease back to the Company to generate a fixed return. The Partnership also will invest its funds buying shares of public companies with fundamental values. One of the unique features of the Partnership is an option the limited partners to the partnership will have to convert 100% of their contributed capital regardless of the balance of the capital account to shares of NGFC at a pre-agreed strike price within a pre-agreed period.
On May 18, 2015 we formed Vanguard Energy Inc. (VE) in San Clemente, California as 55% stockholder with an individual Michael Laub as 45% stockholder to conduct some of the business in our Energy and Retail Division through VE. Mr. Laub is the founder and Chief Executive Officer of CNG United LLC based in San Clemente, California that deals in training installation of engines for gasoline vehicles to run on Natural Gas as well as safety and maintenance of hybrid engines and vehicles. On the 23rd of January 2016, the Board of Directors decided to discontinue the operation of VE, due to the same reasons of holding off the vehicle conversion division, and have Mr. Laub who currently manages CNG United LLC work as a consultant for NGFC. The financial cost of setting up and discontinuing VE had been minimal to us due to the expertise of our staff in handling most administrative and filing obligations through our internal team.
Plan of Operation
Below is a brief description of the activities which we have established to accomplish our short term and long term goals:
Energy and Retail Division
38
·
Located several existing gasoline stations with convenience stores in Miami, Florida as our potential acquisition targets after conducting due diligence and required audits.
·
Located manufacturers of mobile Natural Gas fueling stations that we believe could be economically installed in the gasoline stations that we will acquire to add NG distribution.
·
Engaged a business broker to seek out additional gasoline stations with convenience stores and garages for us to acquire.
·
Consulted with a few manufacturing firm in the industry to build our own gasoline and natural gas fuel stations along with convenience stores and a garage to convert vehicles to run on natural gas that we called an “Operational Unit.”
·
Met with overseas investors and management teams to duplicate our business model into a few nations in joint venture with local institutions.
·
Located two gasoline, diesel and propane distribution companies and began negotiations to acquire majority ownership of these companies with possible agreements to let them continue to manage these companies under our Company.
Healthcare Division
·
Seek to expand our subsidiary ECI-LATAM Inc. to do maintenance work for major equipment being sold by other major manufacturers of medical equipment rather than maintaining only the medical equipment of the Swedish manufacturer Getinge Group as we do now.
·
Meet with companies in the Cell Therapy to cure cancer to acquire as subsidiaries of our company for us to break into this new industry that we believe has huge upside potential.
NGLP Limited Partnership
On March 24, 2015, the Company set up NGFC Limited Partnership (“NGLP”, “the Partnership”) with the Company acting as the General Partner. One objective of the Partnership was to raise funds in the private market through any exempt offerings to acquire gasoline stations that the Partnership would lease back to the Company to earn a fixed return. The Partnership also has invested a portion of its funds in the financial markets.
The Board of Directors, at a meeting held on May 19, 2016, approved NGFC to resign as the general partner of NGLP since in the event the investment by NGLP in public company stocks to be more than 40% of the total assets, that may require us to register NGFCOTCQB markets under the Investment Company Act of 1940, that we would like to avoid since the purpose of NGFCsymbol “AREC”. There is to acquire companies to operate through subsidiaries and not be a passive investor while it is more practicalpresently very limited liquidity for NGLP to make a better return on the money NGLP is holding by investing in any alternative investments while NGLP still consider acquiring land and building that house operating gasoline stations to rent to Energy and Retail division of NGFC to get a fixed return on their money.
At the Board meeting held on May 19, 2016, following resolutions were approved:
1.
To appoint I. Andrew Weeraratne the CEO of NGFC as a general partner of NGLP and transfer the profit interest of NGFC to Mr. Weeraratne.
2.
To deconsolidate NGLP in filing future financial statements of NGFC.
3.
For NGFC to resign as general partner of NGFC.
4.
To keep the option the current Limited Partners of NGLP have as of May 20, 2016 to convert 100% of their capital to NGFC shares at $0.30 per shares by March 31, 2017 effective even after deconsolidation of NGLP. If this conversion feature was executed by all 14 limited partners then their total capital (if any of them did not withdraw prior to March 31, 2017) of $535,350 could be converted at $0.30 cents per share to 1,784,500our shares of Class A Common Stock of NGFC.
5.
Not to grant this option to convert limited partnership interest toand we can provide no assurance that our shares of NGFC to any additional contributions to NGLP since NGFC is no longerClass A Common Stock will consolidatetrade or that a public market will bematerialize.
(b) Holders
As of June 11, 2018, the
primary beneficiaryCompany had 128 shareholders of
NGLP.
We filed a Form 8-K on May 20, 2016 announcing the above resolutions but later discovered that we made an error when NGFC resigned as general partnerits Class A Common Stock, 11 shareholders of NGLP without giving 30-days written notice to all limited partners as required by the NGLP Partnership Agreement,its Series A Preferred Stock, and therefore we filed an amended Form 8-K on July 11, 2016 withdrawing the resignationthree shareholders of NGFC as general partner. But since due to other resolutions approved and announced through that Form 8-k filed on May 20, 2015, were according to the
its Series B Preferred Stock.
39
partnership agreement, the deconsolidation of NGLP will go ahead as planned since as per Consolidation Topic 810 released on February 2015 by Financial Accounting Standard Board, being general partner of a partnership itself does not require the reporting person to consolidate the partnership. We plan to give the 30-days written notice to all limited partners the decision of NGFC to resign as general partner and then resign formally and file announcement with the SEC.
Since we consider this deconsolidation to be material,
(c) Dividends
While we have included pro forma information giving effectnot paid any dividends on our common stock since our inception, our longer-term objective is to our surrenderpay dividends in order to enhance stockholder returns when the Board of control over NGLPDirectors deems such action as in the best interest of its shareholders. Our Series B preferred stock, however, receives an 8.0% annual dividend, of which an accrued amount is recorded of $87,157, as of June 30, 2018, and its subsequent deconsolidation beginning Page No F-20 following the Financial Statements and have referred to that elsewhere also throughout the body of the prospectus.
We expect that working capital requirements will continue to accrue to the Series B preferred stock holder.
Any determination to declare a dividend, as well as the amount of any dividend that may be funded through a combinationdeclared, will be based on the board of director’s consideration of our existing fundsfinancial position, earnings, earnings outlook, capital spending plans, outlook on current and further issuancesfuture market conditions, alternative stockholder return methods such as share repurchases, and other factors that our board of securities.directors considers relevant at that time. Our working capital requirementsdividend 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 increasesuch differences are discussed elsewhere in linethis 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 our planned growthoffices 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 business.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.
Our existing working capital,
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
believe is adequate for us to continue withachieved commercial production of thermal coal from our
operation for about 18 monthsDeane Mining Access Energy Mine and
we believe this current offering to provide us more funds to implement some offrom our
expansionary plans. However, we may need to either borrow (for which there is no assurance), and raise funds from any future offerings (for which there is no assurance) facilitating us to acquire gasoline stations with convenience stores, and generate positive cash flow as we have forecasted.Deane Mining Razorblade Surface Mine in May 2018. We believe
it would cost us about $5.8 million to build one of our model Operational Units and that
will require us to raise substantial capital.
We have financed operations to date through the proceeds of the private placement and through a direct public offering of equity. In connection with our business plan, management anticipates additional increases in operating expenses and capital expenditures relating to: (i) developmental expenses associated with a start-up business and (ii) marketing expenses. We intend to finance these expenses with this current offering and further issuances of securities, and debt issuances. Thereafter, we expect we will need to raise additional capital and generate revenues to meet long-term operating requirements. Additional issuances of equity or convertible debt securities will result in dilution to our current shareholders. Further, such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective newrecent 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 five coal mining and processing operating subsidiaries: McCoy Elkhorn Coal LLC (doing business endeavorsas McCoy Elkhorn Coal Company, “McCoy Elkhorn”), Knott County Coal LLC (“Knott County Coal”), Deane Mining LLC (“Deane Mining”), ERC Mining Indiana Corporation (“ERC”), and Quest Processing LLC (“Quest Processing”), all of which are located in eastern Kentucky 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 opportunities, which could significantlyreclamation. McCoy Elkhorn sells its coal to a variety of customers, both domestically and materially restrictinternationally, primarily to the steel making industry as a high-vol “B” coal or blended coal. The coal controlled at McCoy Elkhorn (along with our business operations.
Results of Operation
We have incurred recurring losses to date. Our financial statementsother 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 include adjustments relatinghave 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 recoverabilityCompany’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 realizationsince 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 assetsovercasts and classificationinstalling 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 liabilities$65.88 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 $65.88. 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 mightallows 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 necessary should weable 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 unableroutine maintenance. The allocated cost of for the property at McCoy Elkhorn Coal paid by the company is $58,681.
Due to continueadditional 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 operation.
We expect wevarious 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.
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 meetbring 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:
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 long termother 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.
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:
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.
In addition to the current owned permits and controlled coal deposits described within the above operating requirements. 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. LRR is considered a variable interest entity and is consolidated into Quest Energy’s financial statements.
Production Plans
We expect to raisefund 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.
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.
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.
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.
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 will become effective in January 2017. The rule will impact both surface and underground mining operations, as it will impose stricter guidelines on conducting coal mining operations, and will require more extensive baseline data on hydrology, geology and aquatic biology in permit applications. The rule will also require 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. If the final rule survives judicial review or further legislative action and takes effect, our mining operations could face significant operating restrictions, as well as increased monitoring and restoration costs. Other potential restrictions apply to mining activities on properties that are within the designated boundary of federally protected lands or national forests, or in the vicinity of public roads. These existing and proposed 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.
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 changesin 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, 2017 and June 30, 2018, we had outstanding surety bonds at all of our mining operations totaling approximately $25.38 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
saleuse of
equity or debt securities.
Our consolidated net lossnon-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 fiscalfirst $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.
●
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 October 1,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 September 30,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 $444,455. Duringultimately upheld, and depending on how it is implemented by the fiscal year ended September 30,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 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. 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 realized $17,274need may not be issued, may not be issued in short term gainsa 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 hold $57,176Recovery 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 unrealized capital losses2015. The EPA’s rule requires closure of stocksites that fail to meet prescribed engineering standards, regular inspections of impoundments, and option positionimmediate 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
$333by coal mining and processing operations from the primary hazardous waste laws, such wastes can, in
dividend revenue. Duringcertain circumstances, constitute hazardous substances for the
fiscal year ending September 30, 2015purposes 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
had revenue of $62,429, cost of goods sold of $60,222may be subject to liability under CERCLA and
a gross profit of $2,207 and incurred operating expenses of $407,093.
Breaking down by three divisionssimilar state laws for coal mines that we broke downcurrently 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 Energyfuture and Retailcould also become protected under the ESA. In addition, the USFWS has identified bald eagle habitat in some of the counties were we operate.The Bald and division didGolden 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 make any revenuesubject 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
incurred $370,777are 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
net loss for the fiscal year from October 1, 2014 to September 30, 2015. The Healthcare division made $62,429 revenue for the same period and incurred a net loss of $32,323. NGFC Limited Partnership incurred $21,459 in net loss broken down by $10,266 in capital gains and $28,824 in unrealized capital losses. The Energy and Retail division made $7,008 in short term capital gains, with an unrealized capital loss of $28,352 and dividends of $333.
Our net loss for the fiscal year from inception (October 2, 2013) and ended September 30, 2014 was $88,930. During fiscal year September 30, 2014, we realized $3,281 in short term capital gains and hold $7,379 in unrealized capital losses of stock and option position and generated $120 in dividend revenue. During the fiscal year from inception (October 2, 2013) and ended September 30, 2014, we incurred operating expenses of $84,952.
For the fiscal year from inception (October 2, 2013) and ended September 30, 2014 we had only the Energy and Retail division inthese 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 did not make any revenue but incurred $88,930intend 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.
The Company currently has approximately 204 employees (excluding personnel hired through contractors), with a substantial majority based in net loss.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 Six Month Period Ended June 30, 2018
Our consolidated operations had operating revenues of $144,862$7,023,040 and $14,348,416 for the six monthsthree-months and six-months ended March 31, 2016June 30, 2018, respectively and had $13,200$4,369,998 and $10,982,079 operating revenue for the six monthsthree-months and six-months ended March 31, 2015. WeJune 30, 2017, respectively.
For the three-months and six-months ended June 30, 2018 we have incurred net operating lossesloss attributable to American Resources Corporation Shareholders in the amount of $44,740$1,877,679 and $52,020 respectively$4,617,362, respectively. For the three-months and six-months ended June 30, 2017 we have incurred net loss attributable to American Resources Corporation Shareholders in the amount of $4,140,872 and $7,202,538, respectively.
The primary driver for increased revenue was the same periods. 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. Increase mine production was necessary to fulfill market demands and customer orders. 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 a private offeringour acquisitions, Series B equity investments and loans.
For the
Company commenced in October 2013 and completed in November 2013 and our Direct Public Offering we began in February 2015 and closed onthree months ended June 30,
2015.
40
2018 and 2017, coal sales and processing expenses were $4,619,675 and $4,284,612 respectively, development costs, including loss on settlement of ARO were $2,032,201 and $1,594,120, respectively, and production taxes and royalties $778,124 and $926,421, respectively. Depreciation expense for the same periods ended June 30, 2018 and 2017 were $649,985 and $699,644 respectively.
For the six months ended March 31, 2016June, 2018 and 2015, professional fees2017, coal sales and processing expenses were $17,225$10,093,103 and $14,700$8,848,173 respectively, development costs, including loss on settlement of ARO were $3,719,374 and $3,389,325, respectively, and production taxes and royalties $1,727,917 and $2,598,661, respectively. Depreciation expense for the generalsame periods ended June 30, 2018 and administrative2017 were $1,129,556 and $1,159,288 respectively. Production expenses were $26,420increased according to increased demand for the end product due to market demands and $20,114 respectively. Officer compensationcustomer orders.
Liquidity and Capital Resources
As of June 30, 2018, our available cash was $692,837. 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. We do not have any credit lines currently available to fund our liquidity requirements, and currently there is uncertainty regarding our ability to execute on the above strategy
For the six months ending June 30, 2018 our net cash flow used in operating activities was $2,481,441 and for the six months
ended March 31, 2016 and 2015 were $31,637 and $15,000 respectively and consulting fees forending June 30, 2017 the
six months ended March 31, 2016net cash flow used in operating activities was
$20,250 and there were no consulting fees for the six months ended March 31, 2015. Depreciation and amortization for six months ended March 31, 2016 and 2015 were $25,500 and $4,667 respectively. The increase in amortization for six months ended March 31, 2016 reflects the amortization of customer list we purchased with the acquisition of ECIL.
Breaking down by divisions, for the six months ended March 31, 2016, Energy and Retail division had $4,393 in revenue (in management fees) and had $103,045 in net loss. Healthcare division had $140,469 in revenue and $58,309 in net earnings. NGFC Limited Partnership had $4 in net losses broken down by $83,675 in capital gains, $574 in dividends and $83,453 in capital losses and $800 in professional fees. Energy and Retail division for the same period had $35,410 in capital gains, $535 in dividends and $23,833 in unrealized capital losses.
$594,068.
For the six months
ended March 31, 2015 we had only the Energyending June 30, 2018 and
Retail division.
Due to deconsolidation of NGLP, going forward results of operations of NGLP won’t be consolidated with the NGFC financial statements. This will reduce our consolidated realized capital gains amount as well as the unrealized capital gains and losses. Correspondingly we anticipate the deconsolidation of NGLP to reduce some of our administrative cost such as legal and accounting cost. We do not believe deconsolidating of NGLP will have any effect on our ability to pay the $50,000 promissory note to Southridge since we plan to pay that through our current2017 net cash and sale of marketable securities plus proceeds from our subsidiary ECI Latam Inc.
Liquidity and Capital Resources
As of Septemberused in investing activities were $92,573 and $105,802 respectively.
For the six months ending June 30,
2015 our current assets were $644,392. Our current liabilities were $68,094. Stockholders’ equity was $521,707 as of September 30, 20152018 and
noncontrolling interest were $540,468. The weighted average number of shares outstanding was 22,137,706 for the period from October 1, 2014 to September 30, 2015.
As of September 30, 2014 our current assets were $110,380. Our current liabilities were $3,000. Stockholders’ equity was $107,380 as of September 30, 2014. The weighted average number of shares outstanding was 19,018,733 for the period from Inception (October 2, 2013) to September 30, 2014.
We believe our operational strategy which focuses on using low overhead costs will avail us to manage our current operational activities for approximately 18 to 24 months. During the next 12 months or until such time that we raise enough capital to begin building or purchase our Operational Units, we will be using our working capital to attend investors’ conferences and tradeshows, participating in road shows to meet with potential investors, traveling to meet with investors and paying professional fees needed to comply with SEC regulations. We believe our monthly burn rate to operate the parent company to be approximately between $4,000 and $5,000.
The consolidated Company had approximately $394,298 in2017 net cash on hand and $242,801 in marketable securities as of March 31, 2016. Out of our cash and Marketable securities, $532,186 belongs to NGFC Limited Partnership. We believe we can sustain our operations for approximately 18 to 24 months even if we do not raise additional funds within that period. ECIL had $34,969 cash on as of March 31, 2016. ECIL expects its salaries and overhead to be about $7,000 per month and expects to make enough monthly cash flow from maintenance work and sale of accessories to carry on its activities.
The Company will receive 30% of any capital gain NGFC Limited Partnership (NGLP) makes when the market value of stock and cash balance in NGLP exceeds the total contribution by partners. We believe in the next few months we will be in a position to receive such cash flow from NGLP but there is no assurance that NGLP will make capital gains and the Company will be able to receive 30% of such gains.
NGFC resigned as the general partner of NGLP effective end of the day May 20, 2016. Thus NGFC will receive the 30% of the share of the gains from NGLP through end of the day May 20, 2016 but will not receive any share of gains from NGLP after the effective date. We do not believe this will affect our ability to pay the $50,000 promissory note to Soughridge since we depend on our current cash and sale of marketable securities and any proceeds from our subsidiary ECI Latam Inc. to pay off that $50,000. The payment of this $50,000 will reduce our ability to sustain our operations to about 10 to 12 months without raising any more funds or borrowing money or without depending on our subsidiary ECIL to expand its operations. Currently we have no other arrangement except the agreement we have with Southridge to raise additional capital for working capital or for any acquisitions. However, we are constantly seeking out loans on favorable terms and/or additional equity capital for working capitalfinancing activities were $2,942,368 and for acquisitions but so far have made no agreements.
41
If we managed to find capital and if we succeed in opening one or more Operational Units, we anticipate that fuel sales at such stations along with convenience store sales to generate sufficient cash flow to support our operations after the first 10 months. However, this estimate is based on our assumption of raising enough capital to build or acquire one or more gasoline stations and then generating significant revenues from fuel and convenience store sales. There can be no assurance that such sales levels will be achieved. Therefore, we may require additional financing through loans and other arrangements, including the sale of additional equity. There can be no assurance that such additional financing will be available, or if available, can be obtained on satisfactory terms. To the extent that any such financing involves the sale of our equity securities, the interests of our then existing shareholders, including the investors in the currently registered offering, could be substantially diluted. In the event that we do not have sufficient capital to support our operations we may have to curtail our operations.
Our officers will provide daily management of our company, including administration, financial management, production, marketing and sales. We will also engage other employees and service organizations to provide services as the need arises. These may include services such as computer systems, sales, marketing, advertising, public relations, cash management, accounting and administration.
$377,903 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
$30,000 annually$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
on handfrom operations and
with some shares of our company and the proceeds of any future offering and cash generated by revenue from our planned Operating Units.There can be no assurance that we will be able to successfully develop and open any combined gasoline and NG fueling service stations and vehicle retrofitting garages (when and if we were ready to do that), or otherwise implement any portion of our long term business strategy. We believe that we can control the operating and general and administrative expenses of our operations to be within the cash available from our current offering and from the sales which we may make at any fueling service stations we open. If our initial operations indicate that our business can establish and fulfill a demand for CNG and LNG fueling service stations and converting vehicles to run on NG on a basis which will lead to the establishment of a profitable business, we may seek additional sources of cash to grow the business. We do not currently have any commitments from customers for the use of our proposed fueling service stations or for additional financing.
Other than the potential for the NG market to not develop in the future as the Company currently anticipates, the Company is not aware of any other known trends, demands, commitments, events or uncertainties that will have, or are reasonably likely to have, a material impact on the Company’s revenues or income from continuing operations.
The Company has generated only limited revenue through its healthcare subsidiary and has incurred losses since inception resulting in an accumulated deficit of $556,147 as of December 31, 2015 and $513,489 as of December 31, 2014 and further losses are anticipated in the development of its business. Currently, we have no written or oral communication from stockholders, directors or any officers to provide us any forms of cash advances, loans or sources of liquidity to meet our working capital needs or long-term or short-term financial needs.
debt offerings.
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.
TheBoard
Results of Directors’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.
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
at a meeting held on March 10, 2015, approved to form NGFC Limited Partnership (“Partnership”), a Florida Limited Partnership effective as of March 24, 2015, and entered into an agreement for the Company to be the General Partner of the Partnership. The Company filed a Form 8-K with the SEC disclosing the formation of the Partnership. The Partnership, located at 7135 Collins Ave No. 624, Miami Beach, FL 33141, had an offering up to one million dollars ($1,000,000) of its limited partnership interests (the “Interests”) only to 99 Limited Partners (“LP”) out of which 64 would be Accredited Investors (as defined under the Investment Act of 1940, as amended, and the rules and regulations thereunder) and to 35 sophisticated investors to invest a minimum of $50,000 each in the Partnership. The Partnership intends to offer the Interests pursuant to the private transaction exemption in Securities and Exchange Commission (“SEC”) Regulation D, Rule 506.
Following is a summary of the terms of the Partnership Agreement:
o
The General Partner will not charge any management fee to manage the Partnership.
42
o
At the end of each calendar quarter the Partnership will calculate the Net Asset Value (NAV) and any excess of NAV will be distributed 70% to the Limited Partners and 30% to the General Partner.
o
Net Asset Value (NAV) of the Partnership means the Partnership's assets, at fair value (“marked to market”), less liabilities, including any accrued but unpaid expenses and reserves for certain circumstances. The “Net Asset Value per Interest” means the Net Asset Value of the Partnership divided by the number of Interests then outstanding. The term “marked to market” is an accounting term used to describe the adjustment of the valuation of a security or portfolio to reflect current market values. The Partnership will mark all positions, to market at the close of each quarterly trading period in order to calculate performance, taking into account both realized and unrealized profits and losses.
o
The Partnership will grant all Limited Partners the option to convert one hundred percent of the capital they have contributed to the Partnership to shares of the General Partner, NGFC Equities, Inc. at a strike price based on the market price of NGFC at the time limited partners make the capital contribution to be expired within a certain period.
o
Fiscal Year of the Partnership shall end on September 30th of each year (to coincide with the fiscal year of the General Partner), which fiscal year may be changed by the General Partner, in its sole and absolute discretion.
The Board of Directors, at a meeting held on May 19, 2016, approved NGFC to resign as the general partner of NGLP since in the event the investment by NGLP in public company stocks to be more than 40% of the total assets, that may require us to register NGFC under the Investment Company Act of 1940, that we would like to avoid since the purpose of NGFC is to acquire companies to operate through subsidiaries and not be a passive investor while it is more practical for NGLP to make a better return on the money NGLP is holding by investing in any alternative investments while NGLP still consider acquiring land and building that house operating gasoline stations to rent to Energy and Retail division of NGFC to get a fixed return on their money.
At the Board meeting held on May 19, 2016, following resolutions were approved:
1.
To appoint I. Andrew Weeraratne the CEO of NGFCcontinue as a general partner of NGLP and transfergoing concern which contemplates, among other things, the profit interest of NGFC to Mr. Weeraratne.
2.
To deconsolidate NGLP in filing future financial statements of NGFC.
3.
For NGFC to resign as general partner of NGFC.
4.
To keep the option the current Limited Partners of NGLP have as of May 20, 2016 to convert 100% of their capital to NGFC shares at $0.30 per shares by March 31, 2017 effective even after deconsolidation of NGLP. If this conversion feature was executed by all 14 limited partners then their total capital (if any of them did not withdraw prior to March 31, 2017) of $535,350 could be converted at $0.30 cents per share to 1,784,500 shares of Class A Common Stock of NGFC.
5.
Not to grant this option to convert limited partnership interest to shares of NGFC to any additional contributions to NGLP since NGFC is no longer will consolidate or will be the primary beneficiary of NGLP.
We filed a Form 8-K on May 20, 2016 announcing the above resolutions but later discovered that we made an error when NGFC resigned as general partner of NGLP without giving 30-days written notice to all limited partners as required by the NGLP Partnership Agreement, and therefore we filed an amended Form 8-K on July 11, 2016 withdrawing the resignation of NGFC as general partner. But since due to other resolutions approved and announced through that Form 8-k filed on May 20, 2015, were according to the partnership agreement, the deconsolidation of NGLP will go ahead as planned since as per Consolidation Topic 810 released on February 2015 by Financial Accounting Standard Board, being general partner of a partnership itself does not require the reporting person to consolidate the partnership. We plan to give the 30-days written notice to all limited partners the decision of NGFC to resign as general partner and then resign formally and file announcement with the SEC.
Since we consider this deconsolidation to be material, we have included pro forma information giving effect to our surrender of control over NGLP and its subsequent deconsolidation beginning Page No F-21 following the Financial Statements and have referred to that at various places in this prospectus.
Critical Accounting Policies
The preparation of financial statements requires management to utilize estimates and make judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The estimates are evaluated by management on an ongoing basis, and the results of these evaluations form a basis for making decisions about the carrying valuerealization 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 not readily apparent from other sources. Although actual results may differ from these estimates under different assumptionsreasonably likely to result in material increases or conditions, management believesdecreases 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
the estimates used in the preparation of our financial statementshave or are
reasonable. The critical accounting policies affecting our financial reporting are summarized in Note 2 to the financial statements included elsewhere in this report.
43
Recent Accounting Pronouncements
We determined that all other issued, but not yet effective accounting pronouncements are inapplicable or insignificant to us and once adopted are not expectedreasonably likely to have a material impactcurrent or future effect on our financial position.
Anticipated Future Trends
Duecondition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to increase in future supply of NG, we expect NG prices to stay below the prices of gasoline and diesel in the future, making it more attractive for consumers to use NG powered vehicles. We also expect global governments to encourage using NG as an alternative fuel and continue to give both direct and indirect subsidies in the form of tax credits to encourage use of natural gas. We also expect the EPA to make the process of conversion of vehicles to NG to be less stringent as this technology develops further and as the benefits of using NG becomes more readily apparent.
investors.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
None.
DIRECTORS AND EXECUTIVE OFFICERS
The following
individuals serve assets forth information regarding our
directors and executive
officers and members of our board of directors:officers.| Name | | Age | | Positions |
Name
| | Age
| | Positions
|
| Mark C. Jensen | | 38 | | |
James C. New
| | 70
| | Chief Executive Officer, Chairman of the Board of Directors |
| | | | |
I. Andrew Weeraratne
Thomas M. Sauve | | 65
39 | | Chief Executive Officer, President, Director
|
| | | | |
| Kirk P. Taylor | | 39 | | Chief Financial Officer Director |
| | | | |
Eugene Nichols
Tarlis R. Thompson
| | 69
35 | | President, Secretary, Treasurer, Director
|
| | | | |
Bo G. Engberg
| | 68
| | Director
Chief Operating Officer
|
James
Mark C. Jensen - Chairman & Chief Executive Officer: Mark has been an operator, investor and consultant in various natural resources and energy businesses. 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. 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. Since 2007, Tom also worked as a managing member at T Squared Capital LLC, an investment firm focused on private equity styled investing in start-up businesses Tom received his Bachelors degree in Economics, magna cum laude, from the University of Rochester, New age 70, ChairmanYork, 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 joining 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. 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.Tarlis 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.
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
Mr. New has served as
Our board of directors currently consists of two members, including our Chairman of the Board of Directors since inception. Mr. New has over 20 years of experience in the healthcare industry, and is the retired Chairman of the Board of Directors of Aurora Diagnostics, LLC (“Aurora”), where he still serves as a director. Aurora was co-founded by Mr. New in July 2006 which grew to approximately $300 million during his tenure. He also served as Aurora’s Chief Executive Officer and President from 2006 until his retirement in September 2011. Priorour President.
In evaluating director candidates, we will assess whether a candidate possesses the integrity, judgment, knowledge, experience, skills and expertise that are likely to
joining Aurora, Mr. New was a private investor from 2003 to 2006. He served asenhance the
President, Chief Executive Officer and Chairman of AmeriPath, an anatomic pathology laboratory company, from January 1996 through 2003. Prior to joining AmeriPath, Mr. New served as the President, Chief Executive Officer, and a director of RehabClinics, an outpatient rehabilitation company Mr. New had his bachelor’s degree in Allegheny College in 1967 and got an MBA from Gannon University in 1971.I. Andrew Weeraratne, age 65, Chief Executive Officer, Chief Financial Officer, Director
Mr. Weeraratne has served as our Chief Executive Officer and member of our board of directors since inceptiondirectors’ ability to manage and took over alsodirect our affairs and business, including, when applicable, to enhance the position of Chief Financial Officer as of August 6, 2014. Prior to joining the Company, Mr. Weeraratne served as the President on a part-time basis of four private investment companies, including Passerelle Corp. (since February 2000), Andwe One Limited Partnership (since September 2006), PAR Holding Partnership (since June 2011) and Scanflo Partnership (since April 2013). He also assumed duties as general partner of NGFC Limited Partners as of May 21, 2016. Mr. Weeraratne continues to devote efforts part-time to these entities. Mr. Weeraratne also served as Chief Financial Officer of China Direct, Inc. (NASDAQ: CDII) from February 2009 to May 2009. From August 2004 to December 2008, Mr. Weeraratne acted as a financial consultant working in a variety of industries including work with the Embassyability of the United Statescommittees of America in Iraq as a financial advisor to form an Iraqi Accounting Association to introduce International Accounting Standards to Iraq as part of a plan to privatize state-owned enterprises after the Iraq war. From December 1998 to February 2000, Mr. Weeraratne was the Chief Financial Officer of National Lampoon, Inc. (formerly known as J2 Communications), a provider of branded comedic content. Mr. Weeraratne has been a Florida licensed Certified Public Accountant since 1981, and has also served as a financial consultant to various global entities. He is also an author, and wrote a book entitledUncommon Commonsense Steps to Super Wealth,where he illustrates how some people beginning with very little ended up in
44
the list of richest people on earth by focusing only one out of four ways to make their wealth. Currently, Mr. Weeraratne devotes approximately 80% of his time to our business and affairs. Mr. Weeraratne is a Certified Public Accountant in the State of Florida.
Eugene Nichols, age 69, President, Secretary, Treasurer, Director
Mr. Nichols has served as our Vice President, Secretary, Treasurer and a director since inception and was a founder of the company. Mr. Nichols has over 30 years of sales, management and marketing experience with a Fortune 100 company. Since 1999, along with his wife Evelyn Nichols, he has owned and operated Informa Training Partners, a healthcare related sales training company located in Walpole, Massachusetts. He began his professional career as a sales representative at Beecham Massengill in Bristol, Tennessee, where he was employed from 1972 to 1976. From May 1976 until October 2002, he was employed with Abbott Diagnostic holding various positions including sales executive, sales trainer, district manager and director advertising and communication. Mr. Nichols devotes approximately 90% of his time to our business and affairs. Mr. Nichols graduated with a bachelor’s degree in Business Administration from Auburn University in 1972.
Bo G. Engberg, age 68, Director
Mr. Engberg joined as a director of our company on October 12, 2013. He began his career in sales, in 1972, with Electrolux A.B. (NASDAX OMX, Stockholm), the leading manufacturer of household appliances in Sweden and then joined their international division in 1974. At that time Getinge A.B., which currently is the leading manufacturer of infection control equipment, was a division of Electrolux. In 1979, Mr. Engberg was recruited by Getinge group to focus on infection control equipment as a sales director. He continued as the Director of Sales of Getinge (currently the biggest medical and pharmaceutical company in Sweden, a public company listed on NASDAX OMX, Stockholm) for the next 41 years relocating to a few places in the world. Mr. Engberg retired in April of 2013. He is fluent in English, Spanish, Portuguese, French, German, Italian and Swedish. Mr. Engberg obtained a bachelor’s degree in Electrical Engineering from Zimmermanska Technical Institute in Vasteras, Sweden in 1970.
Kazuko Kusunoki, Vice President of Administration
Ms. Kazuko Kusunoki began her career as a freelance writer for magazines in Japan. From October 1991 to May 1994 she worked for Subaru International Co. Ltd in Tokyo, Japan as a Translator, Editor and Coordinator. From June 1994 to February 1996 she worked as a freelance translator working on software manuals, automobile magazines and other technical documents. From March 1996 to October 2000 Kazuko worked for Fujitsu Learning Media Limited in Tokyo, Japan as Software Localization Project Manager and Coordinator. She moved to the USA in 2001 and from 2001 to the present time she has been working as a freelance translator for various major translation companies, especially translating content on websites, for clients such as Eurail, Akamai, Citigroup and MasterCard etc. Kazuko has a BA in Commerce from Waseda University, Tokyo, Japan in March 1989 and got a certificate in Local Area Network support from UCLA Extension in California in June 2002. Kazuko’s responsibilities will include keeping a schedule of all the mandatory filings we have to with the SEC and tax authorities to assure they are done on time. Also she will be instrumental in doing our SEC filing using in-house software to edgarize and XBRL the process. She will also help us expand our operations in Japan by meeting with Japanese businesses that we have already begun negotiation to acquire. Kazuko Kusunoki is the wife of I. Andrew Weeraratne the CEO and CFO of NGFC Equities, Inc.
Director Qualifications
The following is a discussion for each director of the specific experience, qualifications, attributes or skills that our board of directors to conclude thatfulfill their duties. Our directors hold office until the individual should be serving as a directorearlier of our company.
James C. New – Mr. New’s extensive career in leadership positions, his successful track record as a private, entrepreneurtheir death, resignation, retirement, disqualification or removal or until their successors have been duly elected and board member were factors considered by the Board. Specifically, the Board viewed favorably his roles at Aurora Diagnostics, LLC, AmeriPath and RehabClinics, his experience in founding a successful company and three years as a private investor in reaching their conclusion.
I. Andrew Weeraratne – Mr. Weeraratne’ s experience as a chief financial officer for public companies in a variety of industries, together with his international experience were factors considered by the board of directors. Specifically, the board of directors viewed favorably his roles at China Direct, Inc., Passerelle Corp., National Lampoon, Inc., Business Resource Exchange, as a financial advisor working with the Embassy of the United States of America in Iraq, and as a CPA in private practice in reaching their conclusion.
Eugene Nichols – Mr. Nichols’s career as an entrepreneur and his involvement in various start-ups were factors considered by the board of directors. Specifically, the board of directors viewed favorably his roles at Communication Exchange Inc., Visa Exchange Inc., Foxfire Golf Course, Power Management Electrical Consultants and Informa Training Partners in reaching their conclusion.
45
Bo G. Engberg –Mr. Engberg’s long sales career with one major Swedish public company that is a leader in international market and his fluency in various languages and cultures were factors considered by the board of directors. Specifically, the board of directors viewed his leadership skills in rising through the ranks at Getinge group in reaching their conclusion.
In addition to each of the individual skills and background described above, the board of directors also concluded that each of these individuals will continue to provide knowledgeable advice to our other directors and to senior management on numerous issues facing our company and on the development and execution of our strategy.
We expect to expand our board of directors in the future to include additional independent directors. In adding additional members to our board of directors, we will consider each candidate’s independence, skills and expertise based on a variety of factors, including the person’s experience or background in management, finance, regulatory matters and corporate governance. Further, when identifying nominees to serve as director, we expect that our board of directors will seek to create a board of directors that is strong in its collective knowledge and has a diversity of skills and experience with respect to accounting and finance, management and leadership, vision and strategy, business operations, business judgment, industry knowledge and corporate governance.
qualified.
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.
Director Independence
Currently our board of directors consist of Mark C. Jensen, our Chief Executive Officer, and Thomas M. Sauve, our President, neither of which are considered independent in accordance under the requirements of the NASDAQ, NYSE and SEC. Shortly after the conclusion of this offering, we intend to have our board of directors consist of five members, including, two of which include our Chief Executive Officer and our President, and three of which are expected to be independent directors in accordance under the requirements of the NASDAQ, NYSE and SEC.
Committees of the Board of Directors
Shortly after the conclusion of this offering, we intend to have an audit committee of our board of directors and may have such other committees as the board of directors shall determine from time to time. We anticipate that each of the standing committees of the board of directors will have the composition and responsibilities described below.
Audit Committee
Shortly after the conclusion of this offering we intend to establish an audit committee. As required by the rules of the SEC, the audit committee will consist solely of independent directors, subject to the phase-in exceptions. 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 will oversee, review, act on and report 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 will oversee our compliance programs relating to legal and regulatory requirements. We expect to adopt 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.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to
all of our
executiveemployees, officers and
any other persons performing similar functions. Thisdirectors. In addition to the Code
providesof Business Conduct and Ethics, our principal executive officer, principal financial officer and principal accounting officer are also subject to written
policies and standards that
we believe are reasonably designed to deter wrongdoing and
promoteto promote: honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional
relationships, andrelationships; full, fair, accurate, timely and understandable disclosure in reports
we fileand documents that are filed with,
or submitted to the
SEC. A copySEC 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
has been filed with the SEC as an exhibiton our internal network. We intend to
the registration statement of which this prospectus is a part.Committeesdisclose future amendments to, or waivers from, certain provisions of our BoardCode of DirectorsBusiness Conduct and the Role of our Board in Risk Oversight
Our board of directors has determined that the separation of the offices of chairman of the board and principal executive officers enhances board independence and oversight and facilitates the communication between senior management and the board of directors regarding risk oversight, which the board of directors believes strengthens its risk oversight activities. Moreover, the separation of the chairman of the board and principal executive officer will allow the principal executive officer to better focus on his responsibilities of running the company, enhancing shareholder value and expanding and strengthening our business while allowing the chairman of the board to lead the board of directors in its fundamental role of providing advice to and independent oversight of management. Mr. Weeraratne servesEthics as our Chief Executive Officer, which is our principal executive officer, and as one of the three members of our board of directors. Mr. Engberg is considered an independent director under the definition in the NYSE MKT Company Guide, but we do not have a “lead” independent director. The board of directors oversees our business affairs and monitors the performance of management. In accordance with our corporate governance principles, the board of directors does not involve itself in day-to-day operations. Our independent director keeps himself informed through discussions with our executive officers and by reading the reports and other materials that we may send him and by participating in board of directors meetings.
We have not established any committees, including an Audit Committee, a Compensation Committee or a Nominating Committee, any committee performing a similar function. The functions of those committees are being undertaken by board of directors as a whole. Because we only have one independent director, we believe that the establishment of these committees would be more form over substance.
We do not have a policy regarding the consideration of any director candidates which may be recommended by our shareholders, including the minimum qualifications for director candidates, nor has our board of directors established a process for identifying and evaluating director nominees. Further, when identifying nominees to serve as director, while we do not have a policy regarding the consideration of diversity in selecting directors, however, at such time as we expand our board of directors, our board of directors will seek to create a board of directors that is strong in its collective knowledge and has a diversity of skills and experience with respect to accounting and finance, management and leadership, vision and strategy, business operations, business judgment, industry knowledge and corporate governance. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our shareholders, including the procedures to be followed. Our board of directors has not considered or adopted any of these policies as we have never received a recommendation from any shareholder for any candidate to serve on our board of directors. Given our relative size and lack of directors and officers insurance coverage, we do not anticipate that any of our shareholders will
applicable.
46
make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our board of directors will participate in the consideration of director nominees. In considering a director nominee, it is likely that our board of directors will consider the professional and/or educational background of any nominee with a view towards how this person might bring a different viewpoint or experience to our board of directors.
Mr. Weeraratne is considered an “audit committee financial expert” within the meaning of Item 401(e) of Regulation S-K. In general, an “audit committee financial expert” is an individual member of the audit committee or board of directors who:
| | |
| ·
| understands generally accepted accounting principles and financial statements;
|
| | |
| ·
| is able to assess the general application of such principles in connection with accounting for estimates, accruals
and reserves;
|
| | |
| ·
| has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and
complexity to our financial statements;
|
| | |
| ·
| understands internal controls over financial reporting; and
|
| | |
| ·
| understands audit committee functions.
|
Our securities are not quoted on an exchange that has requirements that a majority of our board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our board of directors include “independent” directors, nor are we required to establish or maintain an Audit Committee or other committee of our board of directors.
EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth information concerning the annual and long-term compensation of our Chief Executive Officer, and the executive officers who served at the end of the periods of September 30, 2015 and September 30, 2014, for services rendered in all capacities to us.us during the last two completed fiscal years. The listed individuals shall hereinafter be referred to as the “Named Executive Officers.” Currently,We also have included below a table regarding compensation paid to our directors who served during the last completed fiscal year. The address for all individuals identified in the following tables is 9002 Technology Lane, Fishers, IN 46038.
Summary Compensation Table - Officers
| | | | | | | | | | | |
| | | | | | | | | deferred | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Name and principal position | | | | | | | | | | |
| I. Andrew Weeraratne, | | 2017 | 5,000 | -0- | -0- | -0- | -0- | -0- | -0- | 5,000 |
| (1) CEO, CFO | | 2016 | 22,800 | -0- | -0- | -0- | -0- | -0- | -0- | 22,800 |
| | | | | | | | | |
| Mark C. Jensen, (2) CEO | | 2017 | 156,000 | -0- | -0- | -0- | -0- | -0- | | 156,000 |
| | | | | | | | -0- | |
| | | | | | | | | |
| Thomas M. Sauve, (3) President | | 2017 | 156,000 | -0- | -0- | -0- | -0- | -0- | -0- | 156,000 |
| | | | | | | | | |
| Kirk P. Taylor, (4) CFO | | 2017 | 156,000 | -0- | -0- | -0- | -0- | -0- | -0- | 156,000 |
| | | | | | | | | |
Tarlis R. Thomson (5) COO
| | 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 salary amount listed in this table, $32,000 was accrued and unpaid in 2017. The employment agreement for fiscal year 2017 also allows for payment of a bonus that has not yet been calculated. 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. |
| |
| (3) | Of the salary amount listed in this table, $32,000 was accrued and unpaid in 2017. The employment agreement for fiscal year 2017 also allows for payment of a bonus that has not yet been calculated. 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. |
| |
| (4) | Of the salary amount listed in this table, $26,293 was accrued and unpaid in 2017. The employment agreement for fiscal year 2017 also allows for payment of a bonus that has not yet been calculated. 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. |
| (5) | Mr. Thompson was appointed as an officer of the Company (Chief Operating Officer) on September 20, 2018. His compensation for 2017 reflects his role as Superintendent of Surface and Processing Facilities of the Company. |
Director Compensation Table
The following table summarizes the compensation awarded to, earned by or paid to our current and past directors.
| | Fees Earned or Paid in Cash | | | Non-Equity Incentive Plan Compensation | Nonqualified deferred compensation earnings | | |
Name and principal position | | | | | | | | |
James C. New (1) | | -0- | 1,500 | -0- | -0- | -0- | -0- | 1,500 |
I. Andrew Weeraratne (2) | | -0- | -0- | -0- | -0- | -0- | -0- | -0- |
Eugene Nichols (3) | | -0- | 15,000 | -0- | -0- | -0- | -0- | 15,000 |
Bo G. Engberg (4) | | -0- | 1,500 | -0- | -0- | -0- | -0- | 1,500 |
William D. Bishop (5) | | -0- | -0- | 50,000 | -0- | -0- | -0- | 50,000 |
Mark C. Jensen (6) | | -0- | -0- | -0- | -0- | -0- | -0- | -0- |
Thomas M. Sauve (7) | | -0- | -0- | -0- | -0- | -0- | -0- | -0- |
__________
| (1) | Mr. New submitted his resignation to the Company on February 7, 2017 in connection with a change of control of the Company. |
| |
| (2) | Mr. Weeraratne submitted his resignation to the Company on February 7, 2017 in connection with a change of control of the Company. |
| |
| (3) | Mr. Nichols submitted his resignation to the Company on February 7, 2017 in connection with a change of control of the Company. |
| |
| (4) | Mr. Engberg submitted his resignation to the Company on February 7, 2017 in connection with a change of control of the Company. |
| |
| (5) | 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. |
| |
| (6) | 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. |
| |
| (7) | 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. |
| |
| 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. |
Employment Agreements
Except for our Chied Operating Officer, we have
no employment agreements with
any of our Directors or Officers. For the
fiscal year ended September 2015 our directors except the CEO/director were given 10,000 shares each valued at $0.15 cents per share. The President/director Eugene Nichols was given an additional 90,000 shares valued at $0.15 cents per share. CompensationNamed Executive Officers that provide for the
future will be determined whenbase salaries and
if additional funding is obtained.
Summary Compensation Table – Officers
| | | | | | | | | |
(a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) |
| | Salary | Bonus | Stock Awards | Option Awards | Non-equity Incentive plan compensation | Change in Pension Value and
Nonqualified deferred compensation earnings | All other Compen-sation | Total |
Name and principal position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) |
I. Andrew Weeraratne (1),
CEO, CFO | 2015 | 20,500 | -0- | -0- | -0- | -0- | -0- | -0- | 20,500 |
I. Andrew Weeraratne,
CEO, CFO | 2014 | 22,800 | -0- | -0- | -0- | -0- | -0- | -0- | 22,800 |
(1)
There is no employment contract with Mr. Andrew Weeraratne at this time. Nor are there any agreements for compensation in the future. Aa discretionary annual performance bonus of up to three times their annual base salary, and stock options and/or warrants program may be developed in the future. The amount of value for the services of Mr. Weeraratne was determined by agreement for shares in which he received as a founders for (1) control, (2) willingness to serve on the Board of Directors and (3)plus potential participation in the foundational daysCompany’s Employee Incentive Stock Option Plan. The payment of such bonus and/or incentive stock options shall be in the sole discretion of the corporation. The amountCompany’s Board of Directors.
Outstanding Equity Awards
None of our current executive officers received by Mr. Weeraratne is not reflectiveany equity awards, including, options, restricted stock or other equity incentives from the Company as of the true valuedate 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 contributed efforts by Mr. Weeraratne and was arbitrarily determined by the company.
For the period from October 1, 2015 to current date Mr. Weeraratne had been paid $2,000 per month.
Director Compensation Table
| | | | | | | |
(a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) |
| Fees earned or paid in cash | Stock Awards | Option Award(s) | Non-equity Incentive plan compensation | Change in Pension Value and
Nonqualified deferred compensation earnings | All other Compen-sation | Total |
Name and principal position | ($) | ($) | ($) | ($) | ($) | ($) | ($) |
James C. New,
Chairman of the Board of Directors | -0- | 1,500 | -0- | -0- | -0- | -0- | 1,500 |
I. Andrew Weeraratne, Director | -0- | -0- | -0- | -0- | -0- | -0- | -0- |
Eugene Nichols,
President, Secretary, Treasurer, Director | -0- | 15,000 | -0- | -0- | -0- | -0- | 15,000 |
Bo G. Engberg, Director | -0- | 1,500 | -0- | -0- | -0- | -0- | 1,500 |
The Directors have not been paid any fees for the period from October 1, 2015 to the current date.
Limitation on Liability
The Florida Business Corporation Act permits, but does not require, corporations to indemnify a director, officer or control personcourse 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 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.
three years.
Director Independence
Mr. Engberg is considered independent within NYSE MKT’s director independence standards pursuant to the NYSE MKT Company Guide.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table
presents information concerning the beneficial ownership of the shares of our Common Stocklists, as of the date of this
report, by: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
namedcommon stock; (ii) each executive
officersofficer and
current directors, (ii) alldirector of our
currentcompany; and (iii) all executive officers and directors as a
groupgroup. Information relating to beneficial ownership of Common Stock and
(iii)our Convertible Preferred Stock by our principal shareholders and management is based upon information furnished by each person
we knowusing “beneficial ownership” concepts under the rules of the Securities and Exchange Commission. Under these rules, a person is deemed to be
thea beneficial owner of
5%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
our outstanding sharesthe same securities, and a person may be deemed to be a beneficial owner of
common stock.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
tabletables is c/o
NGFC Equities Inc., 45 Almeria Avenue, Coral Gables, Florida 33134.
| | | | | | | | | |
Name | Number of Shares of Class A Common Stock Beneficially Owned (1) | Percent of Class A Common Stock Owned (2) | | Number of Shares of Class B Common Stock Beneficially Owned (1) | Percent of Class B Common Stock Owned (3)(4) | | Voting Control by Officers & Directors | Percent of Voting Control by Officers & Directors (5) | |
| | | | | | | | | |
Officers and Directors | | | | | | | | | |
| | | | | | | | | |
I. Andrew Weeraratne (3)
Chief Executive Officer,
Chief Financial Officer, Director | 4,000,000 | 22.11 | % | 7,000,000 | 100 | % | 74,000,000 | 84.00 | % |
| | | | | | | | | |
James C. New
Chairman of the Board of Directors | 760,000 | 4.2 | % | | | | 760,000 | 0.86 | % |
| | | | | | | | | |
Eugene Nichols
President, Director (6) | 1,300,000 | 7.19 | % | | | | 1,300,000 | 1.48 | % |
| | | | | | | | | |
Bo Engberg
Director (6) | 760,000 | 4.2 | % | | | | 760,000 | 0.86 | % |
| | | | | | | | | |
All Directors and Officers as a Group (4 persons) | 6,420,000 | 37.69 | % | 7,000,000 | 100 | % | 76,820,000 | 87.20 | % |
| | | | | | | | | |
5% Holders | | | | | | | | | |
| | | | | | | | | |
Goran Antic | 3,000,000 | 16.58 | % | | | | 3,000,000 | 3.41 | % |
| | | | | | | | | |
All Directors, Officers and 5% Holders as a Group (5 persons) | 9,420,000 | 54.28 | % | 7,000,000 | 100 | % | 79,820,000 | 90.61 | % |
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)
| 1,688,350 | 9.99% |
________________
| (1) | | |
| (1)
| A person is deemed to be the beneficial owner of securities that can be acquired by such a person within 60 days from the date of this prospectus, 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 18,092,67418,875,811 shares of ClassCommon Stock deemed to be outstanding as if one or more warrants were exercised up to the maximum amount of 9.99% (or 1,688,350 shares) of the issued and outstanding number of shares at December 31, 2017, including the common shares issuable from the conversion of the Series A Preferred to common and the conversion of the Series B Preferred to common (exclusive of any shares due to Series B Preferred holders from accrued interest). 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, Alexander Lau, who is a principal of Golden Properties and a beneficial owner through Golden Properties, is a holder of 59,133 Series A Preferred shares. Accordingly, Golden Properties, Ltd. is presently deemed the beneficial owner of 1,885,460 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 Golder Properties' beneficially owns (including all shares underlying all the warrants owned by Golder Properties and excluding those Series A Preffered shares owned by Alexabder Lau stated above) is 5,050,339 shares.
|
| 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 | 1,541,693 | 32.00% | 5,138,977 | 30.32% |
| Thomas M. Sauve (9), President, Director | 1,300,803 | 27.00% | 4,336,010 | 25.58% |
| Kirk P. Taylor, Chief Financial Officer | 486,115 | 10.09% | 1,620,383 | 9.56% |
| Tarlis R. Thompson, Chief Operating Officer | 48,951 | 1.02% | 163,170 | 0.96% |
All Directors and Officers as a Group (4 persons) (10) | 3,277,562 | 70.11% | 11,258,540 | 66.42% |
| 5% Holders | | | | |
| Gregory Q. Jensen | 486,115 | 10.09% | 1,620,383 | 9.56% |
| Adam B. Jensen | 486,115 | 10.09% | 1,620,383 | 9.56% |
All Directors, Officers and 5% Holders as a Group (6 persons)
| 4,349,792
| 90.29% | 14,499,306 | 89.79% |
| (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, 2017, 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 4,817,792 shares of Series A Convertible Preferred Stock outstanding as of the date of this report.December 31, 2017. These percentages have been rounded for convenience; |
| (3)
|
| (6) | Mr. Weeraratne owns 100% of all outstanding 7,000,000 shares ofAssuming the Series A Preferred Stock is converted to Class B common stock, which has 10:1 voting rights and is convertible into shares ofA Common Stock;
|
| |
| (7) | Based on 892,044 Class A Common Stock on a 1:1 basis at the option of the holder; |
| (4)
| Based on 7,000,000 shares of Class B common stock outstanding as of the date of this report.December 31, 2017. These percentages have been rounded for convenience;
|
| (5)
(6)
|
| (8) | Based on 25,092,674Mr. Jensen beneficially owns 58,933 shares of bothour Series A Convertible Preferred Stock through his equity ownership in T Squared Partners, LP, which shares are included in the table above;
|
| |
| (9) | Mr. Sauve beneficially owns 38,417 shares of our Series A Convertible Preferred Stock through his equity ownership in T Squared Partners, LP, which shares are included in the table above; |
| |
| (10) | Our officers and directors do not own any shares of our Class A and Class B common stockCommon Stock (892,044 shares outstanding as of the date of this report. These percentages have been rounded for convenience.
Is also a limited partners of NGFC Limited Partnership and 200,000December 31, 2017) or any shares of the total reflect the numberour Series B Convertible Preferred Stock (850,000 shares outstanding, exclusive of share of NGFC that would be beneficially owned in the event 100% of the capital contributed to NGFC Limited Partnership is converted toany shares of NGFC at $0.30 per share.
due from accrued interest). |
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS,
WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS
Mr. I. Andrew Weeraratne,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, an officer of the Company advanced $50,000 to the Company. The advance is unsecured, non-interest bearing and due on demand.
Director Independence.
We have not:
●
Established our Chief Executive Officer and Chief Financial Officerown definition for determining whether our director or nominees for directors are “independent” nor has it adopted any other standard of independence employed by any national securities exchange or inter-dealer quotation system, though our current directors would not be deemed to be “independent” under any applicable definition given that he is alsoan officer of the President, Chief Financial Officer and a directorCompany; nor,
●
Established any committees of High Tech Fueling and Distribution Inc. (HFSD) a company that beganthe Board of Directors.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the objectiveSEC a registration statement on Form S-1 (including the exhibits, schedules and amendments thereto) under the Securities Act, with respect to the shares of setting up NG fueling stationsour common stock offered hereby.
This prospectus does not contain all of the information set forth in
China in joint venturethe registration statement and the exhibits and schedules thereto. For further information with
HJT, as mentioned elsewhererespect 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
accordingas to
what we have been informed, is in the
businesscontents of
converting vehicles to run on NG in China.
At a Board of Directors meeting held on May 19, 2016 I. Andrew Weeraratne the CEO of NGFC was appointed as the general partner of NGLP as NGFC resigned as the general partner of NGLP.
Mr. Eugene Nichols, is a founder and organizerany contract, agreement or any other document are summaries of the Companymaterial terms of such contract, agreement or other document and our President, Secretary and Treasurer and Director,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 alsomade to the exhibits for a director of HFSD. Mr. Nichols, as a founder and organizermore complete description of the Companymatter involved. A copy of the registration statement, and thus needs to disclose any relevant transactionsthe 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 he will havecontains reports, proxy and information statements and other information regarding registrants that file electronically with the Company. Ms. Mary Nichols the spouse of Mr. Eugene Nichols is a limited partner of NGLP and as such has the option to convert 100% of her limited partnership interest of $60,000 to 200,000 shares of NGFC by March 31, 2017.
Mr. Bo Engberg is a director of our Company and Mr. Engberg has not received compensation for his services as a directorSEC. The address of the Company. Bo EngbergSEC’s website is www.sec.gov.
As a
limited partnerresult of
NGLP and as such has the optionthis offering, we will become subject to
convert 100% of his limited partnership interest of $60,000 to 200,000 shares of NGFC by March 31, 2017.
49
On February 24, 2015 we acquired 8,250,000 shares of ECI-LATAM Inc. (representing 55%) from Mr. Goran Antic in exchange for 3,000,000 unregistered Class A Common Stock of NGFC.
In September 2015 we gave 10,000 unregistered Class A Common Stock priced at $0.15 cents per share each to three directors Eugene Nichols James New and Bo Engberg as directors’ fees.
Eugene Nichols, the President/Director was given an additional 90,000 unregistered Class A Common Stock priced at $0.15 cents per sharefull information requirements of the company.
AlsoExchange Act. We will fulfill our Board approvedobligations with respect to such requirements by filing periodic reports and gave High Tech Fueling, Service and Distribution Inc. (HFSD) 510,000 unregistered Class A Common Stock of NGFC priced at $0.15 cents per share (total value of $76,500) and $1,000 in cash as one time management fees since NGFC was the continuation of HFSD that began to set up NG stations in China. However, HFSD never began its operations. HFSD is a related entity since major shareholders of NGFC are also major shareholders of HFSD. We filed the required insider formsother information with the SEC regarding these issues on time on September 28, 2015.
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.
50
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
NGFC EQUITIES, INC.
7,500,000 SHARES OF CLASS A COMMON STOCK
PROSPECTUS
No dealer, sales representative or any other person has been authorized to give any information or to make any representations other than those contained in this prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the company or any of the underwriters. This prospectus does not constitute an offer of any securities other than those to which it relates or an offer to sell, or a solicitation of any offer to buy, to any person in any jurisdiction where such an offer or solicitation would be unlawful. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create an implication that the information set forth herein is correct as of any time subsequent to the date hereof.
June---, 2016
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of this offering in connection with the issuance and distribution of the securities being registered, all of which are to be paid by the Company, are as follows:
| | | | |
Various Filing Fees | | $ | 5,000 | * |
Legal Fees and Expenses | | $ | 8,000 | * |
Accounting Fees and Expenses | | $ | 6,000 | * |
Miscellaneous Expenses | | $ | 4,000 | * |
Total | | $ | 23,000 | * |
* Estimate
INDEMNIFICATION OF DIRECTORS AND OFFICERS
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 him/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.
INDEX TO FINANCIAL STATEMENTS
For the Period Ended June 30, 2018
| Page |
| |
| Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017 | F-2 |
| |
| Consolidated Statements of Operations for the six months ended June 30, 2018 and 2017 (unaudited) | F-3 |
| |
| Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited) | F-4 |
| |
| Notes to Unaudited Consolidated Financial Statements for the six months ended June 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-10 |
| |
| Consolidated Balance Sheets at December 31, 2017 and 2016 | F-11 |
| |
| Consolidated Statements of Operations for the years ended December 31, 2017 and 2016 | F-12 |
| |
| Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2017 and 2016 | F-13 |
| |
| Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016 | F-14 |
| |
| Notes to Consolidated Financial Statements | F-15 |
AMERICAN RESOURCES CORPORATION
UNAUDITED
| | | |
|
| | | |
| CURRENT ASSETS | | |
| Cash | $ 692,837 | $ 186,722 |
| Accounts Receivable | 1,768,428 | 1,870,562 |
| Inventory | 66,344 | 615,096 |
| Prepaid fees | 323,924 | - |
| Accounts Receivable - Other | 25,193 | 30,021 |
| Total Current Assets | 2,876,726 | 2,702,401 |
| | | |
| OTHER ASSETS | | |
| Cash - restricted | 246,328 | 198,943 |
| Processing and rail facility | 2,914,422 | 2,914,422 |
| Underground equipment | 9,315,392 | 8,887,045 |
| Surface equipment | 4,439,263 | 3,957,603 |
| Mining rights | 2,217,952 | - |
| Less Accumulated Depreciation | (5,950,125) | (4,820,569) |
| Land | 178,683 | 178,683 |
| Accounts Receivable - Other | 94,769 | 127,718 |
| Note Receivable | 4,117,139 | 4,117,139 |
| Total Other Assets | 17,573,823 | 15,560,984 |
| | | |
| TOTAL ASSETS | $ 20,450,549 | $ 18,263,385 |
| | | |
LIABILITIES AND STOCKHOLDERS' DEFICIT |
| | | |
| CURRENT LIABILITIES | | |
| Accounts payable | $ 4,994,777 | $ 5,360,537 |
| Accrued management fee | - | 17,840,615 |
| Accrued interest | 591,344 | 336,570 |
| Accrued dividend on Series B | 87,157 | - |
| Funds held for others | 24,052 | 82,828 |
| Due to affiliate | 124,000 | 124,000 |
| Current portion of long term-debt (net of issuance costs and debt discount of $666,884 and $35,000) | 13,120,060 | 9,645,154 |
| Current portion of reclamation liability | 2,275,848 | 2,033,862 |
| Total Current Liabilities | 21,217,238 | 35,423,566 |
| | | |
| OTHER LIABILITIES | | |
| Long-term portion of note payable (net of issuance costs of $434,455 and $440,333) | 5,282,930 | 5,081,688 |
| Reclamation liability | 20,668,914 | 17,851,195 |
| Total Other Liabilities | 25,951,844 | 22,932,883 |
| | | |
| Total Liabilities | 47,169,082 | 58,356,449 |
| | | |
| STOCKHOLDERS' DEFICIT | | |
| AREC - Class A Common stock: $.0001 par value; 230,000,000 shares | | |
| authorized, 892,044 and 892,044 shares issued and outstanding for the period end | 89 | 89 |
| AREC - Series A Preferred stock: $.0001 par value; 4,817,792 shares | 482 | 482 |
| authorized, 4,817,792 shares issued and outstanding | | |
| AREC - Series B Preferred stock: $.001 par value; 20,000,000 shares | 850 | 850 |
| authorized, 850,000 shares issued and outstanding | | |
| Additional paid-in capital | 19,367,869 | 1,527,254 |
| Accumulated deficit | (46,636,957) | (42,019,595) |
| Total American Resources Corporation's Shareholders' Deficit | (27,267,667) | (40,490,920) |
| Non controlling interest | 549,134 | 397,856 |
| Total Stockholders' Deficit | (26,718,533) | (40,093,064) |
| | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ 20,450,549 | $ 18,263,385 |
The accompanying footnotes are integral to the unaudited consolidated financial statements
AMERICAN RESOURCES CORPORATION
UNAUDITED
For the Three and Six Months Ended June 30, 2018 and 2017
| | | | | |
| | | | | |
| | | | | |
| Coal Sales | $ 7,023,040 | $ 3,859,841 | $ 14,328,900 | $ 9,577,939 |
| Processing Services Income | 0 | 510,157 | 19,516 | 1,404,140 |
| | | | | |
| Total Revenue | 7,023,040 | 4,369,998 | 14,348,416 | 10,982,079 |
| | | | | |
| Cost of Coal Sales and Processing | (4,619,675) | (4,284,612) | (10,093,103) | (8,848,173) |
| Accretion Expense | (447,762) | (513,706) | (895,524) | (841,767) |
| Loss on settlement | - | (95,930) | - | (251,852) |
| Depreciation | (649,985) | (699,644) | (1,129,556) | (1,159,288) |
| General and Administrative | (556,683) | (405,554) | (1,033,272) | (824,750) |
| Professional Fees | (163,412) | (113,976) | (438,015) | (421,283) |
| Production Taxes and Royalties | (778,124) | (926,421) | (1,727,917) | (2,598,661) |
| Development Costs | (2,032,201) | (1,498,190) | (3,719,374) | (3,137,473) |
| | | | | |
| Total Expenses from Operations | (9,247,842) | (8,538,033) | (19,036,761) | (18,083,247) |
| | | | | |
| Net Loss from Operations | (2,224,802) | (4,168,035) | (4,688,345) | (7,101,168) |
| | | | | |
| Other Income | 290,609 | 64,596 | 419,123 | 241,574 |
| Gain on cancelation of debt | 315,000 | - | 315,000 | - |
| Receipt of previously impaired receivable | 92,573 | 123,917 | 92,573 | 123,917 |
| Interest Income | - | - | 41,171 | - |
| Interest expense | (311,295) | (96,754) | (558,449) | (225,287) |
| | | | | |
| Net Loss | (1,837,915) | (4,076,276) | (4,378,927) | (6,960,964) |
| | | | | |
| Less: Series B dividend requirement | (17,000) | - | (87,157) | - |
| | | | | |
| Less: Net income attributable to Non Controlling Interest | (22,764) | (64,596) | (151,278) | (241,574) |
| | | | | |
| Net loss attributable to American Resources Corporation Shareholders | $ (1,877,679) | $ (4,140,872) | $ (4,617,362) | $ (7,202,538) |
| | | | | |
| Net loss per share - basic and diluted | $ (2.10) | $ (4.71) | $ (5.18) | $ (10.42) |
| | | | | |
| Weighted average shares outstanding | 892,044 | 878,704 | 892,044 | 691,462 |
The accompanying footnotes are integral to the unaudited consolidated financial statements
AMERICAN RESOURCES CORPORATION
UNAUDITED
For the 6 Months Ended June 30, 2018 and
For the 6 Months Ended June 30, 2017
| | | |
| Cash Flows from Operating activities: | | |
| Net loss | $ (4,378,927) | $ (6,960,964) |
| Adjustments to reconcile net income (loss) to net cash | | |
| Depreciation | 1,129,556 | 1,159,288 |
| Accretion expense | 895,524 | 841,767 |
| Loss on reclamation settlements | - | 251,852 |
| Assumption of note payable in reverse merger | - | 50,000 |
| Gain on cancelation of debt | (315,000) | - |
| Recovery of previously impaired receipts | (92,573) | (123,917) |
| Amortization of debt discount | 126,529 | 55,721 |
| Change in current assets and liabilities: | | |
| | | |
| Accounts receivable | 102,134 | 2,320,358 |
| Inventory | 548,752 | - |
| Prepaid expenses and other assets | (323,924) | 205,250 |
| Accounts payable | (369,510) | 1,988,336 |
| Funds held for others | (58,776) | 89,000 |
| Accrued interest | 254,774 | 60,000 |
| Reclamation liability settlements | - | (530,759) |
| Cash used in operating activities | (2,481,441) | (594,068) |
| | | |
| Cash Flows from Investing activities: | | |
| | | |
| Advances made in connection with management agreement | (99,582) | (75,000) |
| Advance repayment in connection with management agreement | 192,155 | - |
| Cash paid for PPE, net | - | (30,802) |
| Cash provided by (used in) investing activities | 92,573 | (105,802) |
| | | |
| Cash Flows from Financing activities: | | |
| | | |
| Principal payments on long term debt | (1,147,974) | (144,833) |
| Proceeds from long term debt | 4,281,965 | 200,000 |
| Net payments to factoring agreement | (191,623) | (277,264) |
| Proceeds from sale of Series B Preferred Stock | - | 600,000 |
| Cash provided by financing activities | 2,942,368 | 377,903 |
| | | |
| Increase(decrease) in cash and restricted cash | 553,500 | (321,967) |
| | | |
| Cash and restricted cash, beginning of period | 385,665 | 925,627 |
| | | |
| Cash and restricted cash, end of period | $ 939,165 | $ 603,660 |
| | | |
| 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 | $ 272,500 |
| Purchase of related party note receivable in exchange for Series B Equity | $ - | $ 250,000 |
| Preferred Series B dividends | $ 87,157 | $ - |
| 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 | $ - |
| | | |
| Cash paid for interest | $ 171,954 | $ 109,566 |
| Cash paid for income taxes | $ - | $ - |
The accompanying footnotes are integral to the unaudited consolidated financial statements
AMERICAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Resources Corporation (ARC or the Company) was formed in June 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.
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 six months ended June 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 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.
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.
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 (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. The balance as of June 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 June 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 $24,052 and $82,828, respectively. See note 5 regarding the management agreement.
The balance as of June 30, 2018 and December 31, 2017 was $246,328 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 six months ended June 30, 2018 and June 30, 2017.
| | | |
| Cash | $ 692,837 | $ 373,190 |
| Restricted Cash | 246,328 | 230,470 |
| Total cash and restricted cash presented in the consolidated statement of cash flows | $ 939,165 | $ 603,660 |
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 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. 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. 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 estimatedcoal 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 the periods ending June 30, 2018 and 2017, $- and $251,852 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 – six months June 30, 2018 | 895,524 |
| Reclamation work – six months June 30, 2018 | (0) |
| Point Rock Acquisition | 2,098,052 |
| Wayland Acquisition | 66,129 |
| Balance at June 30, 2018 | $ 22,944,762 |
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 June 30, 2018 and December 31, 2017 amounted to $0, for both periods. Allowance for other accounts receivables as of June 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 June 30, 2018 and December 31, 2017.
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 |
| - | ASU 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.
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 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 June 30, 2018 and December 31, 2017, property and equipment were comprised of the following:
| | | |
| Processing and rail facility | $ 2,914,422 | $ 2,914,422 |
| Underground equipment | 9,315,392 | 8,887,045 |
| Surface equipment | 4,439,263 | 3,957,603 |
| Land | 178,683 | 178,683 |
| Less: Accumulated depreciation | (5,950,125) | (4,820,569) |
| | | |
| Total Property and Equipment, Net | $ 13,115,587 | $ 11,117,184 |
Depreciation expense amounted to $649,985 and $699,644 for the three month periods June 30, 2018 and June 30, 2017, respectively. Depreciation expense amounted to $1,129,556 and $1,159,288 for the six month periods June 30, 2018 and June 30, 2017, respectively.
The estimated useful lives are as follows:
| Processing and Rail Facilities | 20 years |
| Surface Equipment | 7 years |
| Underground Equipment | 5 years |
NOTE 3 - NOTES PAYABLE
The increase in debt includes the following:
| Total debt balance as of December 31, 2017 | $ 14,726,842 |
| |
During the six-month period ended June 30, 2018, $1,600,000 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, $300,000 of this note was repaid. | 1,600,000 |
| |
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. | 1,000,000 |
| |
During May 2018, the company entered into a financing arrangement with two unrelated parties. The notes totaled $2,150,000, carried an original issue discount of $43,035, 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. | 2,106,965 |
| |
| Total increases to debt | 5,188,625 |
| |
| Less cash payments | (1,147,974) |
| |
In May 2018, an unrelated party forgave $315,000 of the $540,000 equipment loan agreement dated September 30, 2016. | (315,000) |
| |
During the six-month period ended June 30, 2018 net repayments to the factoring agreement totaled $191,623. | (191,623) |
| |
| Net change in issuance cost and loan discounts | 142,120 |
| |
| Ending debt balance at June 30, 2018 | $ 18,402,990 |
| |
| Less current portion | 13,120,060 |
| |
| Total long-term debt at June 30, 2018 | $ 5,282,930 |
NOTE 4 - RELATED PARTY TRANSACTIONS
On June 12, 2015, the Company executed a consulting agreement with an entity with common ownership. During the six month periods June 30, 2018, 2017, respectively
The amount outstanding and payable as of June 30, 2018 and December 31, 2017, was $17,840,615 and $17,840,615, respectively. The amount is due on demand and does 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.
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 funds advanced for the six-month period ended June 30, 2018 and 2017 are $99,582 and $75,000, respectively and the amounts repaid totaled $192,155 and $, respectively. During the six month period ended June 30, 2018 and 2017, fees paid under the agreement amounted $267,845 and $0, respectively which has been recorded in other income.
NOTE 6 – EQUITY TRANSACTIONS
There were no common or other series A preferred transactions for the three-month period ending 2018.
Total preferred dividend requirement for the six month period ending June 30, 2018 and 2017 amounted to $87,157 and $0, respectively.
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.
NOTE 8 - SUBSEQUENT EVENTS
During July 2018, the company drew an additional $700,000 on the ARC business loan and during September 2018, the company drew an additional $125,000 on the ARC business loan of which $75,000 has been paid
During July 2018, the company entered into digital marketing consulting agreement with an unrelated entity. For compensation of services, the company will transfer an initial 150,000 shares of common stock and then pay a monthly fee of $25,000 and quarterly stock fee of 150,000 shares of common stock. The agreement has a one-year term. The agreement was terminated on September 11, 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.
During August 2018, the U.S. Treasury Department levied a tax lien against McCoy Elkhorn in the amount of $148,546 of which was recorded in the respective accounts payable balance of the company as of June 30, 2018.
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 105,000 restricted common shares. As compensation under that same agreement, for the first six months we 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 and 45,000 restricted common shares. 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 and another 105,000 restricted common shares. As compensation under that same agreement, for the following six months we will issue to Mr. Marlin Molinaro a five-year option to purchase up to 75,000 common shares of our Company at an exercise price of $1.50 per share and 45,000 restricted 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.
On September 25, 2018, we entered into a permit transfer agreement to transfer two permits related to our Raven preparation plant and the associated Big Branch impoundment. These permits were non-core to our operations and do not have a material effect on our business.
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
AMERICAN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
| | |
| | | |
| | | |
|
| 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
AMERICAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| | |
| | | |
| | | |
| 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
AMERICAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS OF EQUITY
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| 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) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| 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
AMERICAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | |
| | | |
| 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
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 (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 (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.
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.
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.
Cashis 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.
Coal Property and Equipmentare recorded at cost. Coal properties are depreciated using the units-of-production method over the estimated coal deposits. 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:
| | | |
| 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 Taxesinclude 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.
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.
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 Businesseffective 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:
| | | |
| 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 |
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:
| | | |
| | | |
| 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 | 0 |
| | | |
| 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 | 0 |
| | | |
| 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 | 0 |
| | | |
| 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 | 0 |
| | | |
| 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 |
| 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 | 0 |
| | | |
| 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 | 0 |
| | | |
| 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 | 0 |
| | | |
| 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 | 0 |
| | | |
| 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 | $0 |
| | | |
| | 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.
Future minimum principal payments, interest payments and payments on capital leases are as follows:
| Payable In | | | Total Loan and Lease Principal | |
| | | | | |
| 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.
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.
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.
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.
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 shares 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.
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.
| |
| Expected Dividend Yield | 0% |
| Expected volatility | 13.73% |
| Risk-free rate | 1.62% |
| Expected life of warrants | |
| | | | 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.
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 |
| Miscellaneous expenses | $9,000 |
| Total | $30,000 |
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
him/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.
RECENT SALES OF UNREGISTERED SECURITIES
On September 1,
Item 15. Recent Sales of Unregistered Securities.
COMMON STOCK
During the periods ending December 31, 2015,
we sold 10,000 Class A restricted Common Stock of ourDecember 31, 2016 and December 31, 2017, the Company
at $0.15 cents in a private exempt offering to one state of Florida resident. Alsoengaged in the
monthsale of
September we issued additional 743,000 Class A restricted Common Stock with an aggregate value of $111,450 to the following individuals and a corporationits unregistered securities as
fees for various services:
| | | |
Clifford Hunt Esq | 45,000 | 0.15 | 6,750 |
Lynx mgt | 18,000 | 0.15 | 2,700 |
Kazuko Kusunoki | 50,000 | 0.15 | 7,500 |
Eugene Nichols | 100,000 | 0.15 | 15,000 |
James New | 10,000 | 0.15 | 1,500 |
Bo Engberg | 10,000 | 0.15 | 1,500 |
High Tech Fueling, Service and Distribution Inc. | 510,000 | 0.15 | 76,500 |
| 743,000 | | 111,450 |
51
High Tech Fueling, Service and Distribution Inc (HFSD) is a related entity that provided services to NGFC since its inception and thus NGFC Board agreed to give HFSD 510,000 shares valued at $0.15 cents per share plus $1,000 in cash that added up to a total value of $77,500 as management fees. These shares were issued on September 28, 2015 and the Company filed the required insider forms (Form 4) with the Security and Exchange Commission to disclose this to the public also on September 28, 2015.
On November 15, 2015 we gave 50,000 shares of Class A Common Stock to Mr. Nihal Goonewardene, a resident of Maryland, valued at $0.15 cents per share with a total value of $7,500 as consulting fees. Mr. Goonewardene will be involved in seeking out global businesses for us to acquire for cash and stock of our company and also promoting our company with foreign investors.
described below. The shares of our common stock were issued pursuant to an exemption from registration in Section 4(2)4(a)(2) of the Securities Act of 1933. These shares of our common stock qualified for exemption under Section 4(2)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(2)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(2)4(a)(2) since they agreed to receive sharesshare 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(2)4(a)(2) of the Securities Act of 1933 for this transaction.
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.
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.
| Date | | Name | | | | |
| | | | | | | |
| 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 | | | | |
| | | | | | | |
| 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. As of April 20, 2018, 4,817,792 shares of Series A Preferred stock are outstanding.
Pursuant to the Series A Preferred Stock Designation, the holders of the Series A Preferred stock are entitled to 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 B 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 B Preferred stock, par value $0.001 per share, covering up to an aggregate of 20,000,000 shares of Series B Preferred stock. The Series B 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 April 20, 2018, 921,221 shares of Series B Preferred stock are outstanding, which includes 850,000 shares of Series B Preferred stock issued to investors and 71,221 shares of Series B Preferred stock issued as part of the 8.0% annual dividend that is accrued and paid in-kind, as described below.
The holders of Series B Preferred shares are entitled to no voting rights until the holder converts any or all of their Series B Preferred shares to common shares. The holders of the Series B Preferred shall accrue and pay-in-kind with additional Series B Preferred stock a dividend based on an 8.0% annual percentage rate, compounded quarterly in arrears, for any Series B Preferred stock that is outstanding at the end of such prior quarter.
The holders of the Series B Preferred stock are entitled to convert into common shares, at the holder’s discretion, at a conversion price of Three Dollars Sixty Cents ($3.60) per share of common stock, subject to certain price adjustments found in the Series B Preferred stock purchase agreements.
Upon our liquidation, dissolution, distribution of assets or other winding up, the holders of Series B Preferred shares shall have a liquidation preference to the common shares and Series A Preferred shares outstanding in the amount equal to the amount initially invested by the Series B Preferred holder in the Series B Preferred stock at the time of such investment minus the pro rata amount that has been converted into common stock or redeemed.
“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
OPTIONS AND WARRANTS
Pursuant to our 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.
Should all Series B Preferred stock warrant holders fully exercise their right to purchase shares, for cash, the Company will receive $1,702,090 proceeds from such exercises and will increase the common shares outstanding by 305,557 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.
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.
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.
Item 16. Exhibits and Financial Statement Schedules.
(A) Exhibits:
Exhibit Number | | |
Exhibit No.
| Description | Description
| Location Reference |
| | | | |
| | Articles of Incorporation of Natural Gas Fueling and Conversion Inc. (filed | | filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1, filed with the SEC on November 27, 2013)2013 |
| | Amended and Restated Articles of Incorporation of NGFC Equities Inc. | | filed as Exhibit 3.1 to the Company’s 8k filed on February 25, 2015. |
3.2
| | Articles of Amendment to Articles of Incorporation of NGFC Equities, Inc. | | filed as Exhibit 10.2 to the Company’s Form 8-K on February 21, 2017. |
| | Articles of Amendment to Articles of Incorporation of American Resources Corporation dated March 24, 2017. | | filed as Exhibit 3.4 to the Company’s Form 10-Q, filed with the SEC on May 15, 2018. |
| | Bylaws of Natural Gas Fueling and Conversion Inc. (filed | | filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-1, filed with the SEC on November 27, 2013. |
| | |
3.3
| | Amended and Restated Articles of Incorporation of NGFC Equities, Inc. (filed as Exhibit 3.1 to the Company’s 8k filed on February 25, 2015).
|
| | |
3.4
| | By-Laws, of NGFC Equities Inc., as amended and restated (filedrestated. | | filed as Exhibit 3.2 to the Company’s 8k filed on February 25, 2015).2015. |
| | Opinion of Law Office of Clifford J. Hunt, P.A. as to legality | | Filed Herewith |
5.1
| | Opinion of Clifford Hunt Esq (filed as Exhibit 5.1 to S-1 filed 3-28-16)
|
| | |
10.1
| | Form of Subscription Agreement (filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-1, filed with the SEC on November 27, 2013)
|
| | |
10.2
| | Preliminary Joint Venture Agreement (filed as Exhibit 10.2 to the Company’s Registration Statement on Form S-1, filed with the SEC on November 27, 2013)
|
| | |
10.3
| | ECI Latam Inc. Share Exchange Agreement (filed as Exhibit 10.3 to the Company’s 8k filed on February 25, 2015).
|
| | |
10.4
| | ECIL Management and Bonus Agreement (filed as Exhibit 10.4 to the Company’s 8k filed on February 25, 2015).
|
| | |
10.5
| | Articles of Incorporation Vanguard Energy Inc. (filed as Exhibits 10.3 to the Company’s 8k filed on May 19, 2015).
|
| | |
10.6
| | Agreement between NGFC and Mr. Michael Laub (filed as Exhibits 10.4 to the Company’s 8k filed on May 19, 2015)
|
| | |
10.7
| | Management Agreement between Vanguard Energy Inc. and Mr. Laub (filed as Exhibits 10.5 to the Company’s 8k filed on May 19, 2015)
|
| | |
10.8
| | Articles on Incorporation La Veles Inc. (filed as Exhibit 10.1 to the Company’s 8k filed on August 6 , 2015)
|
| | |
10.9
| | Equity Purchase Agreement with Southridge Partners II, LP dated March 23, 2016 (filed as Exhibit 10.9 to S-1 filed 3-28-16)
|
| | |
10.10
| | Registration Rights Agreement with Southridge Partners II, LP dated March 23, 2016 (filed as Exhibit 10.1 to S-1 filed 3-28-16)
|
| | |
10.11
| | Promissory Note issued to Southridge Partners II, LP dated March 23, 2016 (filed as Exhibit 10.11 to S-1 filed 3-28-16)
|
10.12
10.13
| | NGFC Limited Partnership Agreement executed March 24 ,2015 (filed as Exhibit 10.12 to S-1/A 6 filed 6-29-16)
NGFC Limited Partnership Agreement executed March 24 ,2015 *
|
14.1
| | Code of Business Conduct and Ethics (filedEthics. | | filed as Exhibit 14.1 to the Company’s Registration Statement on Form S-1, filed with the SEC on November 27, 2013)2013. |
| | |
23.1
| | Consent of MaloneBailey LLP (filed | | File Herewith |
| | Consent of Law office of Clifford J. Hunt, P.A. included in Exhibit 5.1 | | File Herewith |
| | Mine Safety Disclosure pursuant to Regulation S-K, Item 104 filed herewith. | | filed as Exhibit 23.195.1 to the Company’s Registration Statement on Form S-1, Amendment No. 210-Q, filed with the SEC on May 4, 2016)15, 2018. |
| | |
23.2
101.INS | | Consent of Counsel (included in Exhibit 5.1 to S-1 filed 3-28-16)
XBRL Instance Document | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | |
| 101.CAL | | * Filed herewith
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 | | |
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, to:
|
| | |
| (i)
| include any prospectus required by Section 10(a)(3) of the Securities Act;
|
| | |
| (ii)
| reflect in the prospectus any facts or events arising after the effective date of the 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 the 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) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
|
| | |
| (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, 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 that 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 insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant, the registrant has been advised that in the opinion of the SEC, 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 registration of expenses incurred or paid by a director, officer or controlling person to 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 of 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.
|
(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.
53
| | |
| 5.
| That, for the purpose of determining liability under the Securities Act to any purchaser, if the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. 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 first use, 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 date of first use.
|
| | |
| 6.
| That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
|
| | |
| (i)
| Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§ 230.424 );
|
| | |
| (ii)
| Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
|
| | |
| (iii)
| The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
|
| | |
| (iv)
| Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
|
(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.
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
Coral Gables,Fishers, State of
FloridaIndiana on
July 12, 2016.October 16, 2018. |
| | American Resources Corporation |
| NGFC Equities, Inc.
| | |
| By: | /s/ Mark C. Jensen | |
| By:
| /s/ I. Andrew Weeraratne
Name: Mark C. Jensen | |
| | Name: I. Andrew Weeraratne
| |
| | Title: Chief Executive Officer | |
Each person whose signature appears below hereby constitutes and appoints
I. Andrew Weeraratne,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 |
Signature
| | Title
| | Date
|
/s/Mark C. Jensen | | | | |
/s/ I. Andrew Weeraratne
| | Chief Executive Officer (PEO),
| | July 12, 2016
|
I. Andrew Weeraratne
| | Chief Financial Officer (PAO), Director
| | |
| | | | |
/s/ James C. New
| | Chairman of the Board of Directors, | | July 12, 2016
October 16, 2018 |
JamesMark C. New
Jensen | | Chief Executive Officer | | |
/s/Thomas M. Sauve | | Director, President | | October 16, 2018 |
| Thomas M. Sauve | | | | |
/s/Kirk P. Taylor | | Chief Financial Officer | | October 16, 2018 |
/s/ Eugene Nichols
Kirk P. Taylor | | President, Secretary, Treasurer, Director
(Principal Accounting Officer) | | July 12, 2016
|
Eugene Nichols
| | | | |
| | | | |
/s/ Bo G. Engberg
| | Director
| | July 12, 2016
|
Bo G. Engberg
| | | | |
II-6
55
NGFC Equities, Inc.
Consolidated Financial Statements
| |
| Index
|
| |
Report of Independent Registered Public Accounting Firm
| F-2
|
| |
Financial Statements
| |
| |
Consolidated Balance Sheets as of September 30, 2015
| F-3
|
| |
Consolidated Statements of Operations for the period from October 1, 2014 to December 31, 2015
| F-4
|
| |
Consolidated Statement of Stockholders’ Equity for the period from October 1, 2014 to December 31, 2015 (Deficit)
| F-5
|
| |
Consolidated Statements of Cash Flows for the period from October 1, 2014 to December 31, 2015
| F-6
|
| |
Notes to the Unaudited Consolidated Financial Statements
| F-7
|
| |
Unaudited Consolidated Financial Statements for the quarter ended March 31, 2016
| F-15
|
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors
NGFC Equities, Inc.
Coral Gables, Florida
We have audited the accompanying consolidated balance sheets of NGFC Equities, Inc. (the “Company”) as of September 30, 2015 and 2014 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2015 and 2014, 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.
MaloneBailey, LLP
www.malone-bailey.com
Houston, Texas
December 29, 2015
F-2
Consolidated Balance Sheets
| | | | | | |
NGFC Equities, Inc. |
Consolidated Balance Sheets |
| | | | | | |
| | September 30, 2015 | | September 30, 2014 |
ASSETS | | | | | |
Current assets | | | | | |
| Cash and cash equivalent | $ | 444,775 | | $ | 82,819 |
| Marketable securities | | 195,461 | | | 27,561 |
| Inventory | | 4,156 | | | - |
| Total current assets | | 644,392 | | | 110,380 |
| | | | | | |
Fixed assets | | | | | |
| Software, net | | 3,995 | | | - |
| | | | | | |
Other assets | | | | | |
| Goodwill | | 361,049 | | | - |
| Customer list-net of amortization | | 120,833 | | | - |
| Total other assets | | 481,882 | | | - |
| | | | | | |
Total assets | $ | 1,130,269 | | $ | 110,380 |
| | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | | | |
Current liabilities | | | | | |
| Accrued expenses | $ | 1,200 | | $ | 3,000 |
| Credit Card payable | | 14,387 | | | - |
| Deferred revenue | | 33,953 | | | - |
| Loan payable officer | | 18,554 | | | - |
| Total current liabilities | | 68,094 | | | 3,000 |
| | | | | | |
Stockholders' equity (deficit) | | | | | |
| Preferred stock: $.0001 par value; 10,000,000 shares authorized, no shares issued and outstanding | | - | | | - |
| Class A Common stock: $.0001 par value; 230,000,000 shares authorized, 18,042,674 and 12,600,000 shares issued and outstanding | | 1,804 | | | 1,260 |
| Class B Common stock: $.0001 par value; 60,000,000 shares authorized, 7,000,000 shares issued and outstanding | | 700 | | | 700 |
| Additional paid-in capital | | 1,032,692 | | | 194,350 |
| Retained earnings (deficit) | | (513,489) | | | (88,930) |
| Total NGFC stockholders' equity (deficit) | | 521,707 | | | 107,380 |
| Non Controlling Interest | | 540,468 | | | - |
| Total Equity | | 1,062,175 | | | 107,380 |
| | | | | | |
Total liabilities and stockholders' equity (deficit) | $ | 1,130,269 | | $ | 110,380 |
| | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. | |
F-3
Consolidated Statements of Operation
| | | | | | |
NGFC Equities, Inc. |
Consolidated Statements of Operations |
| | | Year Ended
September 30, 2015 | Year Ended
September 30, 2014 |
| | |
Sales | | $ | 62,429 | $ | - |
Cost of goods sold | | 60,222 | | - |
| Gross profits | | 2,207 | | - |
| | | | | | |
Operating expenses | | | | |
| Legal fees | | 21,457 | | 23,304 |
| Accounting fees | | 12,550 | | 9,300 |
| Officer compensation | | 62,754 | | 22,800 |
| Depreciation & amortization | | 30,167 | | - |
| Consulting fees | | 166,250 | | - |
| General and administrative | | 113,915 | | 29,548 |
| | Total operating expenses | | 407,093 | | 84,952 |
| | | | | | |
Loss from operations | | (404,886) | | (84,952) |
| | | | | | |
Other income | | | | |
| | | | | | |
| Realized gain on marketable securities | 17,274 | | 3,281 |
| Unrealized loss on marketable securities | (57,176) | | (7,379) |
| Dividends received | | 333 | | 120 |
| | Total other income | | (39,569) | | (3,978) |
| | | | | | |
Net loss | | | (444,455) | | (88,930) |
Less: Net Loss attributable to the Non Controlling Interest | | 19,896 | | - |
| | | | | | |
Net loss attributable to NGFC Shareholders | $ | (424,559) | $ | (88,930) |
| | | | | | |
Net loss attributable to NGFC basic and diluted loss per common share | $ | (0.02) | $ | (0.00) |
| | | | | | |
Basic and diluted weighted average number of common shares outstanding | | 22,137,706 | | 19,018,733 |
| | | | | | |
| | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. | | |
F-4
Consolidated Statements of Stockholders’ Equity
| | | | | | | | | | | | | | | | |
NGFC Equities, Inc. |
Statement of Stockholders' Equity |
| | | | | | | | | Additional | | | | Non- | | Total |
| Common Stock Class A | | Common Stock Class B | | Paid in | | Accumulated | | controlling | | Stockholders' |
| Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Interest | | Equity (Deficit) |
| | | | | | | | | | | | | | | |
Balance at inception October 2, 2013 | - | | - | | �� - | | - | | - | | - | | - | | - |
| | | | | | | | | | | | | | | |
Common stock issued for cash-founder | 6,100,000 | | 610 | | 7,000,000 | | 700 | | - | | - | | - | | 1,310 |
| | | | | | | | | | | | | | | |
Common stock issued for cash | 6,500,000 | | 650 | | - | | - | | 194,350 | | - | | - | | 195,000 |
| | | | | | | | | | | | | | | |
Net loss | - | | - | | - | | - | | - | | (88,930) | | - | | (88,930) |
| | | | | | | | | | | | | | | |
Balance at September 30, 2014 | 12,600,000 | | 1,260 | | 7,000,000 | | 700 | | 194,350 | | (88,930) | | - | | 107,380 |
| | | | | | | | | | | | | | | |
Common stock issued for acquisition | 3,000,000 | | 300 | | - | | - | | 449,700 | | - | | 72,779 | | 522,779 |
| | | | | | | | | | | | | | | |
Common stock issued for cash | 974,674 | | 97 | | - | | - | | 146,104 | | - | | - | | 146,201 |
| | | | | | | | | | | | | | | |
Common stock issued as consulting fees | 1,618,000 | | 162 | | - | | - | | 242,538 | | - | | - | | 242,700 |
| | | | | | | | | | | | | | | |
Common stock bought back | (150,000) | | (15) | | - | | - | | - | | - | | - | | (15) |
| | | | | | | | | | | | | | | |
Minority ownership NGLP | - | | - | | - | | - | | - | | - | | 486,935 | | 486,935 |
| | | | | | | | | | | | | | | |
Minority ownership VE Inc. | - | | - | | - | | - | | - | | - | | 450 | | 450 |
| | | | | | | | | | | | | | | |
Minority ownership La Veles Inc. | - | | - | | - | | - | | - | | - | | 200 | | 200 |
| | | | | | | | | | | | | | | |
Net loss | - | | - | | - | | - | | - | | (424,559) | | (19,896) | | (444,455) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance at September 30, 2015 | 18,042,674 | | 1,804 | | 7,000,000 | | 700 | | 1,032,692 | | (513,489) | | 540,468 | | 1,062,175 |
| | | | | | | | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. | | | |
F-5
Consolidated Statements of Cash Flows
| | | | | | | | | | | |
NGFC Equities, Inc. |
Consolidated Statements of Cash Flows |
| | Year Ended
September 30, 2015 | | Year Ended
September 30, 2014 |
| | |
Cash flows from operating activities: | | | | | |
| Net loss | $ | (444,455) | | $ | (88,930) |
| Adjustments to reconcile net loss to cash used in operating activities: | | | | | |
| Unrealized loss on marketable securities | | 57,176 | | | 7,379 |
| Realized gain on marketable securities | | (17,274) | | | (3,281) |
| Dividends received | | (333) | | | (120) |
| Depreciation and amortization | | 30,167 | | | - |
| Stock based compensation | | 242,700 | | | - |
| Changes in operating assets and liabilities: | | | | | |
| Inventory | | | (4,156) | | | - |
| Prepaid expense | | 2,000 | | | - |
| Deferred revenue | | 33,953 | | | - |
| Accounts payable | | 14,387 | | | - |
| Accrued Expenses | | (1,800) | | | 3,000 |
| | Net cash used in operating activities | | (87,635) | | | (81,952) |
| | | | | | | | |
Investing activities: | | | | | |
| Net cash paid for purchase and sale of trading securities | | (207,469) | | | (80,000) |
| Cash received from purchase of ECIL | | 33,335 | | | - |
| Purchase of software | | (4,995) | | | - |
| | | | | | | | |
| | Net cash used in investing activities | | (179,129) | | | (80,000) |
| | | | | | | | |
Financing activities: | | | | | |
| Common stock bought back, value | | (15) | | | - |
| Payments on loan to related party | | (5,051) | | | - |
| Sale of subsidiary ownership interest for cash | | 487,585 | | | - |
| Proceeds from sale of common stock | | 146,201 | | | 196,310 |
| | Net cash provided by financing activities | | 628,720 | | | 196,310 |
| | | | | | | | |
Net increase in cash | | 361,956 | | | 34,358 |
Cash at beginning of period | | 82,819 | | | - |
| | | | | | | | |
Cash at end of period | $ | �� 444,775 | | $ | 34,358 |
| | | | | | | | |
Supplemental disclosures: | | | | | |
| Cash paid for: | | | | | |
| | Interest | $ | 1,271 | | $ | - |
| | Income taxes | $ | - | | $ | - |
| | | | | | | | |
| Non cash investing and financing activity | | | | | |
| | Net assets purchased from ECIL | $ | 489,444 | | $ | - |
| | Class A shares issued to ECIL | $ | 450,000 | | $ | - |
| | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
F-6
NGFC Equities, Inc.
Notes to Consolidated Financial Statements
September 30, 2015
NOTE 1 – DESCRIPTION OF BUSINESS
We incorporated our Company on October 2, 2013 in the State of Florida under the name “Natural Gas Fueling and Conversion Inc.” We changed our name to NGFC Equities, Inc. (“NGFC”, “the Company”, “we”, “our”) on February 25, 2015. When we began in October 2013, our primary planned business objective was to construct, own and operate combined gasoline, diesel and natural gas (NG) vehicle fueling and service stations in the United States, along with garages to retrofit gasoline and diesel driven vehicles to run on NG. At each such fueling station we also planned to have a convenience store to serve our customers. We defined each complete fueling service station as an “Operating Unit.”
In February 2015 our Board of Directors approved to define the Company’s business through three divisions and diversify the operations of the Company to add a health care division and a consulting division.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
a.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its controlled affiliates. Intercompany transactions, profits and balances are eliminated in consolidation. We have consolidated the financial statements of ECI-LATAM Inc. (ECIL) and Vanguard Energy Inc. (VE) that we own 55% of and La Veles Inc. (LVI) of that we own 80.49% of with the financial statements of our Company. Both VE and LVI that began in FY 2015 have had minimal operations. 100% of the revenue of ECIL for the fiscal year September 30, 2015, came from a single customer.
b.
Cash and Cash Equivalents
Cash consists of cash balances on deposit on bank and cash at investment banker’s account that has been not invested in stocks. The Company believes no significant concentration of credit risk exists with respect to these cash balances. The Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company had no cash equivalents at September 30, 2015 or at September 30, 2014.
c.
Inventory
ECI-LATAM Inc. (ECIL) the 55% owned subsidiary of the Company, has $4,156 in inventory as at September 30, 2015. The inventories are accounted for under (FIFO) and stated at the lower of cost or market (net realizable value). The Company establishes provisions for inventory that is obsolete or when quantities on hand are in excess of estimated forecasted demand. The creation of such provisions results in a write-down of inventory to net realizable value and a charge to cost of sales. The ECIL inventory consists of spare parts that will be sold to its major clients when maintaining their equipment.
d.
Property and Equipment
Property and equipment is capitalized at cost and is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is determined using the straight line method over the estimated useful lives of the various asset classes. Software has been amortized over 5 years. Amortization cost of fiscal year 2015 on software was $1,000.
e.
Long-lived assets
Management evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets in accordance with ASC Topic 360, which generally requires the assessment of these assets for recoverability when events or circumstances indicate a potential impairment exists. Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry or economic trends, a significant decline in the Company’s stock price for a sustained period of time, and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair market value of the assets.
F-7
f.
Goodwill and Intangible Assets
The Company evaluates goodwill and other finite-lived intangible assets in accordance with FASB ASC Topic 350, “Intangibles — Goodwill and Other. “ Goodwill is recorded at the time of an acquisition and is calculated as the difference between the total consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. Accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired. Goodwill is deemed to have an indefinite life and is not amortized, but is subject to annual impairment tests. If the assumptions and estimates used to allocate the purchase price are not correct, or if business conditions change, purchase price adjustments or future asset impairment charges could be required. The value of our goodwill could be impacted by future adverse changes such as: (i) any future declines in our operating results, (ii) a decline in the valuation of customers, including the valuation of our common stock, (iii) a significant slowdown in the worldwide economy or (iv) any failure to meet the performance projections included in our forecasts of future operating results. In accordance with FASB ASC Topic 350, the Company tests goodwill for impairment on an annual basis or more frequently if the Company believes indicators of impairment exist. Impairment evaluations involve management estimates of asset useful lives and future cash flows. Significant management judgment is required in the forecasts of future operating results that are used in the evaluations. It is possible, however, that the plans and estimates used may be incorrect. If our actual results, or the plans and estimates used in future impairment analysis, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges in a future period.
The Company performs its annual impairment review of goodwill in September, and when a triggering event occurs between annual impairment tests for both goodwill and other intangible assets. The Company recorded no impairment loss for the year ended September 30, 2015.
The Company acquired ECI-LATAM Inc. in February 2015 and recorded Customer List as an intangible asset at a value of $150,000 to be amortized in 3 years. The net balance of the customer list as of September 30, 2015 is $120,833. The amortization expenses in financial year 2015 is $29,167.
g.
Income taxes
The Company accounts for income taxes in accordance with accounting guidance now codified as FASB ASC Topic 740, “Income Taxes,” which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.
h.
Basic and Diluted Net Loss Per Share
The Company computes loss per share in accordance with “ASC-260,” “Earnings per Share”, which requires presentation of both basic and diluted earnings per share on the face of the statement of operations. Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive. As of September 30, 2015, the Company had no potential dilutive shares outstanding.
i.
Stock Based Compensation
The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation – Stock Compensation which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital over the period during which services are rendered. There has been no stock-based compensation issued to employees.
The Company follows ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for share-based awards issued to consultants and other non-employees. In accordance with ASC Topic 505-50, these share-based awards issued as compensation for services provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the award, whichever can be more clearly determined.
Total stock-based compensation expense, related to all of the Company’s stock-based awards, recognized for the years ended September 30, 2015 was $242,700 all of which were for non-employee compensation including the shares given to the President and the Directors of the Company as fees. For September 30, 2014 there was no stock based compensation.
F-8
j.
Related Party Transactions
We consider all who own more than 5% shares and equity method investments to be related parties and record any transactions between them and the Company to be related party transactions and disclose such transactions on notes to the Financial Statements.
Under ASC 850, examples of related party transactions also include those between:
- A parent entity and its subsidiaries
- Subsidiaries of a common parent, an entity and trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of the entity's management
- An entity and its principal owners, management, or members of their immediate families and affiliates
Transactions between related parties commonly occur in the normal course of business. Examples of common transactions with related parties are:
- Sales, purchases, and transfers of real and personal property
- Services received or furnished, such as accounting, management, engineering, and legal services
- Use of property and equipment by lease or otherwise
- Borrowings, lendings, and guarantees
- Maintenance of compensating bank balances for the benefit of a related party
- Intra-entity billings based on allocations of common costs
- Filings of consolidated tax returns
- Transactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. For example, an entity may receive services from a related party without charge and not record receipt of the services. While not providing accounting or measurement guidance for such transactions, this Topic requires their disclosure nonetheless.
k.
Fair Value Measurement
The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk.
l.
Noncontrolling Interest
We record the minority ownership of entities that we effectively control but own less than 100% of as noncontrolling interest. As at September 30, 2015 we recorded a total of $540,468 of noncontrolling interest and there were none as of September 30, 2014. These noncontrolling interest were related to NGFC Limited Partnership, ECI-LATAM Inc., Vanguard Energy Inc., and La Veles Inc.
m.
Marketable Securities
The Company has a trading and investment account for its own account and also for NGFC Limited Partnership. The Company’s policy is to acquire various stocks after doing fundamental analysis and hold for long term but trade options to hedge them. Most of these stocks could be sold out if these options get assigned. We record these shares at market price at the end of the day.
n.
Revenue Recognition
Generally, we recognize revenue when persuasive evidence of an arrangement with the customer exists, the product has been delivered and title has passed, provided that we do not have significant post delivery obligations, the amount due from the customer is fixed or determinable, and collectability is reasonably assured. Usually our prices are listed on a price list we give to the customer and we give a discount if they buy large volumes. 95% of the times the customer will issue a purchase order to us (5% of the times customer does not send a PO but requests us to send an invoice). Based on PO, we send the customer an invoice. The term includes “The invoice date starts when the material title is under customer’s name. No cancellation, No return”. Almost all our sales are made simultaneously as the client sends us payment and such sales are also booked as sales on the date of delivery.
We record any revenues collected but not earned as of the financial statement date as deferred revenue. This is primarily composed of revenue our 55% owned subsidiary ECIL receive from their clients in advance of sending and parts or doing the services. As of September 30, 2015 we had deferred revenue of $33,953. There was no deferred revenue as September 30, 2014.
F-9
NOTE 3 – INVESTMENTS IN MARKETABLE SECURITIES
Marketable securities are classified as trading securities and are presented in the consolidated balance sheets at fair value.
Per Accounting Standards Codification 820 “Fair Value Measurement”, fair values defined establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements.
ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that are not corroborated by market data
The Company has classified these marketable securities at level 1 in NGFC Equities, Inc. with a fair value of $27,561 as of September 30, 2014 and $50,862 as of September 30, 2015. In NGFC Limited Partnership (that began in April 2015) the fair value of securities at level 1 is $144,599 as of September 30, 2015.
In June 2014, the Company opened an investment and trading account with Interactive Brokers with a capital of $80,000 to invest in various stocks to receive dividends while hedging them by trading options to receive trading profits managed by its Chief Executive Officer I. Andrew Weeraratne. Of the $80,000 initial capital, $5,733 remains in cash as of September 30, 2015, and has not been actively invested in stock.
NGFC Limited Partnership (NGLP) began account with Interactive Brokers with a capital of $10,000 on April 6, 2015. As of September 30, 2015 NGLP has transferred $380,000 from its operating account to an account with Interactive Brokers. NGLP raised $520,350 capital for NGLP including $35,000 invested by NGFC, the General Partner, and of that capital, $216,843 remains in cash as of September 30, 2015, and has not been actively invested in stock. The investment and trading accounts of consolidated entities are recorded at fair market value adjusting the account both by realized and unrealized gain and losses, as required by generally accepted accounting principles, at a balance of $195,461 as of September 30, 2015 and at a balance of $27,561 as of September 30, 2014. Cash paid for available securities as of September 30, 2015 is $207,469.
The total realized gains for the periods ending September 30, 2015 and September 30, 2014 from trading activities of the consolidated entities were $17,274 and $3,281 respectively. The total unrealized loss of the consolidated entities as of September 30, 2015 was $57,176. The total unrealized loss as of September 30, 2014 was $7,379.
NOTE 4 – CURRENT LIABILITIES
On February 10, 2014 we signed an agreement to lease office space beginning February 15, 2014 where our phones are answered by a common receptionist for $400 per month and we accrued $3,000 as rental expense for the 7.5 months on our September 30, 2014 financial statements. In October 2014, we negotiated the monthly rental expenses to $200 per month to be effective retroactively and further negotiated to pay the annual rent via unregistered shares of our company currently valued at $0.15 cents per share. We extended the lease for another year. On September 1, 2015 we paid the lesser Lynx Management 18,000 restricted Class A Common Shares valued at $0.15 cents per share or a value of $2,700 as rental expenses till March 30, 2015. We have accrued $1,200 as the rental expenses from April 1, 2015 to September 30, 2015.
NOTE 5 – ACQUISITIONS
As part of our diversification strategy, the Company made an agreement on February 24, 2015 with ECI-LATAM Inc. (ECIL), a Florida Corporation that began its business on March 25, 2014 engaged in installation and maintenance of medical equipment to acquire 55% of its 15,000,000 outstanding shares in exchange for 3,000,000 shares of the Company at $0.15 cents per share. For the period ended September 30, 2015 we have consolidated our financial statements with the financial statements of ECI-LATAM Inc. Following is the Consideration paid and the Purchase Price Allocation of the acquisition:
| |
Consideration
| |
3,000,0000 Class A Common Stock of NGFC Equities, Inc. at $0.15 cents
| $450,000
|
Recognized amounts of assets acquired
| |
Customer List
| $150,000
|
Net assets of ECIL
| 11,730
|
| 161,730
|
Noncontrolling interest in ECIL
| (72,779)
|
Goodwill
| 361,049
|
| $450,000
|
The Customer List is given a three-year life and will be amortized accordingly. Goodwill is not amortizable under GAAP. As of acquisition date ECIL had $33,335 cash in bank.
The following unaudited consolidated pro forma financial information gives effect to the acquisition of ECI-LATAM Inc. as if this transaction had occurred at the beginning of each period presented. The following unaudited pro forma information is presented for illustration purposes only and is not necessarily indicative of the results that would have been attained had the acquisition of this business been completed at the beginning of each period presented, nor are they indicative of results that may occur in any future period.
| | |
| Year Ended | Year Ended |
| Sept 30, 2015 | Sept 30, 2014 |
Revenue | 151,597 | 146,011 |
| | |
Net Income (loss) | (435,776) | (63,516) |
| | |
Net loss per share | (0.00) | (0.00) |
NOTE 6 – FORMATION OF NGFC LIMITED PARTNERSHIP
As disclosed in the 8K the Company filed with the Security and Exchange Commission on March 24, 2015, the Company set up NGFC Limited Partnership (“the Partnership”) with the Company acting as the General Partner. The purpose of the Partnership is to raise funds in the private market to acquire gasoline stations that the Partnership would lease back to the Company. The Partnership also will invest its funds in the financial markets. As of September 30, 2015, the Company has contributed $35,000 as capital to the Partnership. The Partnership financial statements are consolidated with the financial statements of NGFC Equities, Inc. recording the ownership of the minority owners as noncontrolling interest. At the end of September 30, 2015, $486,935 of the capital of NGLP is owned by minority owners.
NGFC Limited Partnership located at 7135 Collins Ave, Miami Beach, FL 33141, plans to raise up to a maximum of $1,000,000 pursuant to the private transaction exemption in Securities and Exchange Commission (“SEC”) Regulation D, Rule 506. As of September 30, 2015 the Partnership has raised $485,350 from thirteen limited Partners. These limited partners will have the right to convert their partnership capital to shares of NGFC at $0.30 cents per share by September 30, 2016. In the event all limited partners converted 100% of their current capital to shares of NGFC it would amount to NGFC issuing 1,617,250 additional shares for $485,175.
Following is a summary of the terms of the Partnership Agreement:
·
The General Partner will not charge any management fee to manage the Partnership.
·
At the end of each calendar quarter the Partnership will calculate the Net Asset Value (NAV) and any excess of NAV will be distributed 70% to the Limited Partners and 30% to the General Partner.
·
Net Asset Value (NAV) of the Partnership means the Partnership's assets, at fair value(“marked to market”), less liabilities, including any accrued but unpaid expenses and reserves for certain circumstances. The “Net Asset Value per Interest” means the Net Asset Value of the Partnership divided by the number of Interests then outstanding. The term “marked to market” is an accounting term used to describe the adjustment of the valuation of a security or portfolio to reflect current market values. The Partnership will mark all positions, to market at the close of each quarterly trading period in order to calculate performance, taking into account both realized and unrealized profits and losses.
F-11
·
The Partnership will grant all Limited Partners the option to convert one hundred percent of the capital they have contributed to the Partnership to shares of the General Partner, NGFC Equities, Inc. at the strike price of thirty cents ($0.30 cents) per Share prior to September 30, 2016.
·
Fiscal Year of the Partnership shall end on September 30th of each year (to coincide with the fiscal year of the General Partner), which fiscal year may be changed by the General Partner, in its sole and absolute discretion.
NOTE 7 – FORMATION OF ECI-LATAM ANIMAL HEALH DIVISION AND LA VELES INC
The Company filed an 8k with the SEC on May 7, 2015, to announce the following: On May 6, 2015 ECI-LATAM Inc. 55% owned subsidiary of NGFC Equities, Inc. set up a new division entitled “Animal Health” division appointing Dragana Jovic as the Vice President of that division. Also ECI-LATAM Inc. appointed Bo Engberg and Dr. Marco S Dragic as the directors of the Board of Directors on May 6, 2015.
Further to forming the Animal Health Division we formed a new corporation on August 5, 2015 entitled La Veles Inc. to conduct business of Animal Health Division through this new corporation and an 8k was filed on August 6, 2015 to clarify this event. When we began, we planned to have it as a 55% owned subsidiary with our joint venture partners in Serbia owning 45%. But as of the reporting date, we own 80.49% of La Veles Inc. We formed La Veles Inc. to focus on manufacturing and distribution of a natural cream to cure certain animal diseases by manufacturing certain anti-infections cream in Serbia, but due to discussions we had with our joint venture partners in Serbia we are currently considering to focus only on distribution and not on manufacturing.
La Veles accounts has been consolidated with the financial statements of the Company and we have recorded $200 of capital as owned by minority owners as of September 30, 2015.
NOTE 8 – FORMATION OF VANGUARD ENERGY INC
As described on the 8k the Company filed with the SEC on May 19, 2015, the Company formed a 55% owned subsidiary entitled “Vanguard Energy Inc,” (“VE”) a California corporation with an individual Michael Alexander Laub as the 45% owner. Vanguard Energy Inc. will be based at 924 Calle Negocio Unit B, San Clemente, CA 92673. Mr. Laub currently is the Chief Executive Officer of CNG United LLC that he founded in 2008. CNG United is in the business of Alternative Fuels safety & education. CNG United, conducts vehicle conversions and safety training classes nationally on a regular basis. CNG United also sells conversion systems, CNG parts & accessories to CNG United national network of CNG technician graduates, as well as corporate fleets and municipalities.
Vanguard Energy Inc. will focus on buying established gasoline stations and adding Natural Gas (NG) bays along with conversion garages to convert vehicles to run on NG. VE plans to expand that operation nationwide in joint venture “Franchise” opportunity with mechanics that Mr. Laub already has built relationships. Also VE will look into setting up used car sales lots where VE plans to sell converted hybrid NG vehicles. As of the date of these financial statements VE had no major business activities except setting up a bank account that we have consolidated with our financial statements.
The accounts of VE is consolidated with the accounts of the Company and an amount of $450 has been recorded as owned by minority owners as of September 30, 2015.
NOTE 9 – REPURCHASE OF COMMON STOCK OF FOUNDER AT PAR
On May 13, 2015 ITMM Consulting LLC (ITMM) returned 150,000 Class A Common Stock of the Company that ITMM bought as a founding stockholder back to the Company at their purchase price of $.0001 per share, since ITMM is not able to perform certain consulting work that ITMM agreed to perform due to lack of time. The Company sold ITMM 200,000 shares as a founding member at the par value of $.0001. ITMM will continue to hold 50,000 of the 200,000 shares ITMM bought at par value as a founding shareholder on October 2, 2013. The Company has retired the 150,000 shares.
NOTE 10 – EQUITY
We have 300,000,000 authorized shares of capital stock, which consists of (i) 230,000,000 shares of Class A common stock, par value $0.0001 per share; (ii) 60,000,000 shares of Class B common stock, par value $0.0001 per share; and (iii) 10,000,000 shares of blank-check preferred stock, par value of $0.0001 per share.
The holders of Class A common stock shall be entitled to one vote per share and shall be entitled to dividends as shall be declared by our Board of Directors from time to time. Each share of Class B common stock shall entitle the holder thereof to 10 votes for each one vote per share of Class A common stock, and with respect to such vote, shall be entitled, notwithstanding any provision hereof, to notice of any stockholders’ meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together as a
F-12
single class with holders of Class A common stock with respect to any question or matter upon which holders of Class A common stock have the right to vote. Class B common stock shall also entitle the holders thereof to vote as a separate class as set forth herein and as required by law. Holders of Class B common stock shall be entitled to dividends as shall be declared by our Board of Directors from time to time at the same rate per share as the Class A common stock. The holders of the Class B common stock shall have the right to convert each one of their shares to one share of Class A common stock automatically by surrendering the shares of Class B common stock to us.
As of September 30, 2015 we have 7,000,000 Class B common stock outstanding and 18,042,674 Class A common stock outstanding.
NOTE 11 – SALE OF COMMON STOCK
In February 2015, we began selling Class A Common Stock of our Company for $0.15 cents per share through our Direct Public Offering registered with the Security and Exchange Commission that we terminated as of June 30, 2015. We sold 964,674 Class A Common Stock of our Company for a value of $144,701 and gave to 14 associates 875,000 Class A Common Stock of our Company for an aggregate value of $131,250 for certain work performed and to be performed for us. We have recorded them as consulting fee expenses of the Company.
NOTE 12 – SALE OF UNREGISTERED SECURITIES
On September 1, 2015 we sold 10,000 Class A restricted Common Stock of our Company at $0.15 cents in a private exempt offering to one state of Florida resident. Also in the month of September we issued additional 743,000 Class A restricted Common Stock with an aggregate value of $111,450 to the following individuals and a corporation as fees for various services:
| | | |
Clifford Hunt Esq | 45,000 | 0.15 | 6,750 |
Lynx mgt | 18,000 | 0.15 | 2,700 |
Kazuko Kusunoki | 50,000 | 0.15 | 7,500 |
Eugene Nichols | 100,000 | 0.15 | 15,000 |
James New | 10,000 | 0.15 | 1,500 |
Bo Engberg | 10,000 | 0.15 | 1,500 |
High Tech Fueling, Service and Distribution Inc. | 510,000 | 0.15 | 76,500 |
| 743,000 | | 111,450 |
High Tech Fueling, Service and Distribution Inc (HFSD) is a related entity that provided services to NGFC since its inception and thus NGFC Board agreed to give HFSD 510,000 shares valued at $0.15 cents per share plus $1,000 in cash that added up to a total value of $77,500 as management fees. These shares were issued on September 28, 2015 and the Company filed the required insider forms (Form 4) with the Security and Exchange Commission to disclose this to the public also on September 28, 2015.
NOTE 13 – RELATED PARTY TRANSACTIONS
On September 28, 2015, the Company issued High Tech Fueling, Service and Distribution Inc (HFSD) 510,000 restricted Class A Common Stock priced at $0.15 cents per share for a total value of $76,500 and $1,000 in cash as Management Fee. HFSD began as a US based corporation to set up Natural Gas fueling stations in China in joint venture with a Chinese corporation that led to the inception of NGFC Equities, Inc. in the USA first to focus on setting up similar NG stations in the USA and then changing its strategy to become a holding company yet focus on setting up NG stations through its energy division. The major shareholders of HFSD are also major shareholders of NGFC. HFSD also has certain minority shareholders who helped the inception and formation of HFSD that led to the formation of NGFC and thus the Board of Directors of NGFC decided to give HFSD a one time management fee in return for the work HFSD did to conceive NGFC that NGFC will record as organization cost.
Also the Company gave its President Eugene Nichols 100,000 shares valued at $15,000 in total and gave two of the directors Bo Engberg and James New 10,000 shares each with a valuation of $1,500 each.
On October 28, 2014 Goran Antic the Majority shareholder and the Chief Executive Officer of ECIL loaned to ECIL $30,000 at 5% per annum interest. As of the date of the Company acquired 55% of ECIL the balance was $23,625.
For the year ending September 30, 2015 ECIL paid interest expenses of $1,271 and $5,051of principal payments on that loan and the balance of the loan payable to Mr. Antic as of September 30, 2015 is $18,554. This is an unsecured note with interest at 5% per annum accruing quarterly and with the principal paid back only when cash flow is available.
F-13
NOTE 14 – INCOME TAXES
As of September 30, 2015, the Company had net operating loss carry forwards of $173,708 that may be available to reduce future years’ taxable income through 2032. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards. Components of net deferred tax assets, including a valuation allowance, are as follows at September 30, 2015.
Net Operating loss carry-forward
$ 444,455
Net adjustments to taxes
270,747
Adjusted NOL carry-forward
173,708
Total deferred tax assets
60,798
Less valuation allowances
(60,798)
Net deferred tax asset
$ 0
As of September 30, 2014, the Company had net operating loss carry forwards of $81,551 that may be available to reduce future years’ taxable income through 2032. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards. Components of net deferred tax assets, including a valuation allowance, are as follows at September 30, 2014.
Net Operating loss carry-forward
$ 81,551
Total deferred tax assets
$ 28,543
Less valuation allowances
$ (28,543)
Net deferred tax asset
$ 0
In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment. As a result, management determined it was more likely than not the deferred tax assets would not be realized as of September 30, 2014.
NOTE 15 – SUBSEQUENT EVENTS
On November 15, 2015 we gave 50,000 shares of Class A Common Stock to Mr. Nihal Goonewardene, a resident of Maryland, valued at $0.15 cents per share with a total value of $7,500 as consulting fees. Mr. Goonewardene will be involved in seeking out global businesses for us to acquire for cash and stock of our company and also promoting our company with foreign investors.
F-14
Unaudited Financial Statements
for the quarter ended March 31, 2016
Consolidated Balance Sheets (Unaudited)
| | | | | | |
NGFC Equities, Inc. |
Consolidated Balance Sheets |
(Unaudited) |
| | March 31, 2016 | | September 30, 2015 |
ASSETS | | | | | |
Current assets | | | | | |
| Cash and cash equivalent | $ | 394,298 | | $ | 444,775 |
| Marketable securities | | 242,801 | | | 195,461 |
| Loan receivable related parties | | 687 | | | - |
| Inventory | | 4,894 | | | 4,156 |
| Total current assets | | 642,680 | | | 644,392 |
| | | | | | |
Fixed assets | | | | | |
| Software, net | | 3,495 | | | 3,995 |
| | | | | | |
Other assets | | | | | |
| Goodwill | | 361,049 | | | 361,049 |
| Customer list-net of amortization | | 95,833 | | | 120,833 |
| | | 456,882 | | | 481,882 |
| | | | | | |
Total assets | $ | 1,103,057 | | $ | 1,130,269 |
| | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | | | |
Current liabilities | | | | | |
| Credit Card payable | $ | 2,384 | | $ | 14,387 |
| Deferred revenue | | - | | | 33,953 |
| Loan payable officer | | - | | | 18,554 |
| Rent payable | | 2,400 | | | 1,200 |
| Total current liabilities | | 4,784 | | | 68,094 |
| | | | | | |
Stockholders' equity (deficit) | | | | | |
| Preferred stock: $.0001 par value; 10,000,000 shares authorized, no shares issued and outstanding | | | | | |
| Class A Common stock: $.0001 par value; 230,000,000 shares authorized, 18,092,674 and 18,042,674 shares issued and outstanding for the period end | | 1,809 | | | 1,804 |
| Class B Common stock: $.0001 par value; 60,000,000 shares authorized, 7,000,000 shares issued and outstanding for the period end | | 700 | | | 700 |
| Additional paid-in capital | | 1,040,187 | | | 1,032,692 |
| Accumulated deficit | | (558,254) | | | (513,489) |
| Total stockholders' equity (deficit) | | 484,442 | | | 521,707 |
| Non Controlling Interest | | 613,831 | | | 540,468 |
| Total Equity | | 1,098,273 | | | 1,062,175 |
| | | | | | |
Total liabilities and stockholders' equity (deficit) | $ | 1,103,057 | | $ | 1,130,269 |
| | | | | | |
The accompanying notes are an integral part of these unaudited consolidated financial statements. | | | |
F-15
Consolidated Statements of Operation (Unaudited)
| | | | | | | | | | | | | | |
NGFC Equities, Inc. |
Consolidated Statements of Operations |
(Unaudited) |
| | | 6 Months Ended | | 6 Months Ended | | 3 Months Ended | | 3 Months Ended |
| | | March 31, 2016 | | March 31, 2015 | | March 31, 2016 | | March 31, 2015 |
Revenue | | | | | | | | | | | | |
Sales | | $ | 144,862 | | $ | 13,200 | | $ | 59,997 | | $ | 13,200 |
Cost of goods sold | | | | | | | | | | | |
| Purchases - Parts and Materials | | 54,098 | | | 12,347 | | | 35,464 | | | 12,347 |
| | Total Cost of Goods Sold | | 54,098 | | | 12,347 | | | 35,464 | | | 12,347 |
| | | | | | | | | | | | | |
| Gross profits | | 90,764 | | | 853 | | | 24,533 | | | 853 |
| | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | |
| Legal fees | | 4,535 | | | 7,950 | | | 1,945 | | | 1,750 |
| Accounting fees | | 12,700 | | | 6,750 | | | 7,700 | | | 54 |
| Officer compensation | | 31,637 | | | 15,000 | | | 15,000 | | | 9,800 |
| Depreciation and amortization | | 25,500 | | | 4,667 | | | 12,750 | | | - |
| Consulting fees | | 20,250 | | | - | | | 6,000 | | | - |
| General and administrative | | 26,420 | | | 20,114 | | | 8,609 | | | 8,852 |
| | Total operating expenses | | 121,042 | | | 54,481 | | | 52,004 | | | 20,456 |
| | | | | | | | | | | | | |
Loss from operations | | (30,278) | | | (53,628) | | | (27,471) | | | (19,603) |
| | | | | | | | | | | | | |
Other income | | | | | | | | | | | |
| Long term capital loss | | (550) | | | - | | | (550) | | | - |
| Realized gain on marketable securities | 117,085 | | | 1,194 | | | 78,018 | | | - |
| Unrealized loss on marketable securities | (107,286) | | | (2,204) | | | (51,452) | | | - |
| Dividends received | | 1,109 | | | 333 | | | 102 | | | - |
| | Total other income/(loss) | | 10,358 | | | (677) | | | 26,118 | | | - |
| | | | | | | | | | | | | |
Net loss | | | (19,920) | | | (54,305) | | | (1,353) | | | (19,603) |
Less: Net Income/(Loss) attributable to the Non Controlling Interest | (24,820) | | | 2,285 | | | (730) | | | 2,285 |
| | | | | | | | | | | | | |
Net loss attributable to NGFC Shareholders | (44,740) | | | (52,020) | | | (2,083) | | | (17,318) |
| | | | | | | | | | | | | |
Basic and diluted loss per common share | $ | (0.00) | | $ | (0.00) | | $ | (0.00) | | $ | (0.00) |
| | | | | | | | | | | | | |
Basic and diluted weighted average number of common shares outstanding | | 25,046,438 | | | 20,271,845 | | | 25,046,438 | | | 20,271,845 |
| | | | | | | | | | | | | |
| The accompanying notes are an integral part of these unaudited consolidated financial statements. |
F-16
Consolidated Statements of Cash Flows (Unaudited)
| | | | | | | | | |
NGFC Equities, Inc. |
Consolidated Statements of Cash Flows (Unaudited) |
| | | | Six Months Ended | | Six Months Ended |
| | | | March 31, 2016 | | March 31, 2015 |
Cash flows from operating activities: | | | | | |
| Net loss | $ | (19,920) | | $ | (54,305) |
| Adjustments to reconcile net loss to cash used in operating activities: | | | | | |
| Depreciation and Amortization | | 25,500 | | | 4,667 |
| Realized gain on marketable securities | | 117,085 | | | - |
| Unrealized loss on marketable securities | | (107,286) | | | 2,204 |
| Dividends received | | 1,109 | | | - |
| Stock based compensation | | 7,500 | | | - |
| Changes in operating assets and liabilities: | | | | | |
| Prepaid expenses | | | - | | | 2,000 |
| Inventory | | | (738) | | | - |
| Deferred revenue | | | (33,953) | | | - |
| Accounts payables | | (12,003) | | | (2,640) |
| Accrued expenses | | 1,200 | | | 2,700 |
| | Net cash used in operating activities | | (21,506) | | | (45,374) |
| | | | | | | | |
Investing activities: | | | | | |
| Loans to related party | | (687) | | | (150) |
| Cash received from ECIL | | - | | | 33,335 |
| Purchase of software | | - | | | (4,995) |
| Purchase of investment | | (9,730) | | | (20,430) |
| | Net cash used in investing activities | | (10,417) | | | 7,760 |
| | | | | | | | |
Financing activities: | | | | | |
| Principal payment of shareholder loan | | (18,554) | | | |
| Proceeds from sale of common stock | | - | | | 85,850 |
| | Net cash provided by financing activities | | (18,554) | | | 85,850 |
| | | | | | | | |
Net increase (decrease) in cash | | (50,477) | | | 48,236 |
Cash at beginning of period | | 444,775 | | | 82,819 |
| | | | | | | | |
Cash at end of period | $ | 394,298 | | $ | 131,055 |
| | | | | | | | |
Supplemental disclosures: | | | | | |
| Cash paid for: | | | | | |
| | Interest | $ | 387 | | $ | - |
| | Income taxes | $ | - | | $ | - |
| | | | | | | | |
| Non cash investing and financing activity | | | | | |
| | Net assets purchased from ECIL | $ | - | | $ | 584,785 |
| | Class A shares issued to ECIL | $ | - | | $ | 450,000 |
| |
| The accompanying notes are an integral part of these unaudited consolidated financial statements. |
F-17
NGFC Equities, Inc.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2016
NOTE 1 – DESCRIPTION OF BUSINESS
We incorporated our Company on October 2, 2013 in the State of Florida under the name “Natural Gas Fueling and Conversion Inc.” We changed our name to NGFC Equities, Inc. (“NGFC”, “the Company”, “we”, “our”) on February 25, 2015. When we began in October 2013, our primary planned business objective was to construct, own and operate combined gasoline, diesel and natural gas (NG) vehicle fueling and service stations in the United States, along with garages to retrofit gasoline and diesel driven vehicles to run on NG. At each such fueling station we also planned to have a convenience store to serve our customers. We defined each complete fueling service station as an “Operating Unit.”
In February 2015 our Board of Directors approved to define the Company’s business through three divisions and diversify the operations of the Company to add a health care division and a consulting division.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its controlled affiliates. Intercompany transactions, profits and balances are eliminated in consolidation. We have consolidated the financial statements of ECI-LATAM Inc. (ECIL) that we own 55% of and NGFC Limited Partnership (NGLP) of which we are the General Partner and receive 30% of gains, with the financial statements of our Company. About 70% of the revenue of ECIL for the quarter ended March 31, 2016, came from a single customer.
The accompanying unaudited consolidated financial statements include all accounts of the Company and in the opinion of management, reflect all adjustments, which include all normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations and cash flows for the period from October 1, 2015 to March 31, 2016. The unaudited consolidated financial statements include the accounts of the Company and its controlled affiliates. Intercompany transactions, profits and balances are eliminated in consolidation.
This financial statement period is not an indicative of the results to be expected for the year ending September 30, 2016, or for any other interim period in future. The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s Form 10-K for the fiscal year ended September 30, 2015, filed with the U.S. Securities and Exchange Commission on December 28, 2015.
NOTE 3 – INVESTMENTS IN MARKETABLE SECURITIES
Marketable securities are classified as held-for-trading and are presented in the consolidated balance sheets at fair value.
Per Accounting Standards Codification 820 “Fair Value Measurement”, fair values defined establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements.
ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that are not corroborated by market data
Both the Company and its subsidiary NGFC Limited Partnership have investment and trading accounts with Interactive Brokers LLC (IB) and keep part of this account in cash and part in marketable securities transferring balance between these two accounts as trades occur. The Company has classified marketable securities account at level 1 in consolidated NGFC Equities, Inc. with a fair value of
F-18
$242,801 as of March 31, 2016 and $195,461 as of September 30, 2015. As of March 31, 2016 and September 30, 2015 the consolidated cash balances of these accounts with IB were $215,339 and $222,576 respectively.
For the periods ended March 31, 2016 and 2015 the realized gains from investment accounts were $117,085 and $ 1,194 respectively. Unrealized losses from the accounts for corresponding periods were $107,286 and $2,204 respectively. The dividends for the periods ended March 31, 2016 and 2015 were $1,109 and $333 respectively. For the period ended March 31, 2016 and 2015, $9,730 and $20,430 respectively was paid to purchase securities.
NOTE 4 – ACQUISITIONS OF ECI-LATAM INC.
As part of our diversification strategy, the Company made an agreement on February 24, 2015 with ECI-LATAM Inc. (ECIL), a Florida Corporation that began its business on March 25, 2014 engaged in installation and maintenance of medical equipment to acquire 55% of its 15,000,000 outstanding shares in exchange for 3,000,000 shares of the Company at $0.15 cents per share. For the period ended September 30, 2015 we have consolidated our financial statements with the financial statements of ECI-LATAM Inc. Following is the Consideration paid and the Purchase Price Allocation of the acquisition:
| |
Consideration
| |
3,000,0000 Class A Common Stock of NGFC Equities, Inc. at $0.15 cents
| $450,000
|
Recognized amounts of assets acquired
| |
Customer List
| $150,000
|
Net assets of ECIL
| 11,730
|
| 161,730
|
Noncontrolling interest in ECIL
| (72,779)
|
Goodwill
| 361,049
|
| $450,000
|
The Customer List is given a three-year life and will be amortized accordingly. Goodwill is not amortizable under GAAP. As of acquisition date ECIL had $33,335 cash in bank.
Following table illustrates the Proforma profit and loss of ECIL for the 3 and 6 months ended March 31, 2015 and 2015
| | |
| 6 Months Ending | 3 Months Ending |
| March 31, 2015 | March 31, 2015 |
Revenue | 102,369 | 13,200 |
Net Income | (58,182) | (17,318) |
Net Income per share | (0.00) | (0.00) |
| | |
NOTE 5 – EQUITY
On November 15, 2015 we gave 50,000 shares of Class A Common Stock to Mr. Nihal Goonewardene, a resident of Maryland, valued at $0.15 cents per share with a total value of $7,500 as consulting fees. Mr. Goonewardene will be involved in seeking out global businesses for us to acquire for cash and stock of our company and also promoting our company with foreign investors.
At a Board meeting of NGFC held on December 30, 2015, the board approved to give two entrepreneurs in Eastern Europe (EU)--Boris Abramovic (BA) and Valentin Vicic (VV) (Jointly AV) who have agreed to and have been working with us, talking to investors in EU who are interested in investing in NGFC and also talking to successful businesses in EU who may wish to merge their operations with NGFC—an opportunity to buy one million of unregistered Class A Common Stock of NGFC at .18 cents per share in various installments in ten years. The first installment of $967 payment on that series of payments would be paid by NGFC on behalf of each of them, as consulting fees to AV. We have not executed that agreement yet and plan to execute only after we conclude final discussions. The Company believes that EU is a fast growing geographic location and that NGFC may be able to find many successful businesses who may consider joining with NGFC for mutual benefit and believe AV could play a major role in finding such companies for us.
F-19
At a Board of Directors meeting held on February 29, 2016 the Board approved for an Equity Line sale of $3,000,000 worth of NGFC shares to Southridge Partners II LP at a 90% discount on $0.40 cents per share, the price at which our shares were sold last on OTCPink. Pursuant to this equity line we filed a S-1and subsequently a S-1/A (Amendment Number 1) to get SEC effectiveness for Southridge to sell 7,500,000 shares of our Class A Common Stock on March 29, 2016. Under the terms of the Equity Purchase Agreement, if Southridge cannot sell shares at $0.40 cents per share then they could sell at a lower price (with our approval). We also issued a note for $50,000 to Southridge as payment with reference to this agreement.
The Board also approved to extend the option of Limited Partners of NGFC Limited Partnership (NGLP) to convert their limited partnership capital with NGLP to restricted shares of NGFC Class A Common Stock at $0.30 cents per share prior to March 31, 2017 at the Board meeting held on February 29, 2016.
NOTE 6 – RELATED PARTY TRANSACTIONS
On October 28, 2014 Goran Antic the Majority shareholder and the Chief Executive Officer of ECIL loaned to ECIL $30,000 at 5% per annum interest. As of the date of the Company acquired 55% of ECIL the balance was $23,625. For the year ended September 30, 2015 ECIL paid interest expenses of $1,271 and $5,051 of principal payments on that loan and the balance of the loan payable to Mr. Antic as of September 30, 2015 is $18,554.
For the period ended March 31, 2016 interest paid on the account was $333 and $18,554 was paid as principal payment. Loan has been fully paid of March 31, 2016. This was an unsecured note with interest at 5% per annum accruing quarterly. As March 31, 2016 this loan has been fully paid.
Loan Receivable $687 represent $537 over payment from ECIL when paying back the shareholder loan to the CEO Goran Antic and $150 Florida annual corporate Registration fees NGFC paid on behalf of High Tech Fueling and Distribution Inc, (HFSD). Goran Antic will pay back the $537 and HFSD will pay back the $150 to NGFC in next quarter.
Kazuko Kusunoki, the vice president administration is paid $2,000 in fees per month to handle bookkeeping, computerized filing and system administration. She is the spouse of the CEO Andrew Weeraratne.
NOTE 7 – SUBSEQUENT EVENTS
On May 19, 2016 the Board of Directors approved NGFC to resign as the general partner of NGLP since in the event the investment by NGLP in public company stocks to be more than 40% of the total assets, that may require us to register NGFC under the Investment Company Act of 1940, that we would like to avoid since the purpose of NGFC is to acquire companies to operate through subsidiaries and not be a passive investor while it is more practical for NGLP to make a better return on the money NGLP is holding by investing in any alternative investments while NGLP still consider acquiring land and building that house operating gasoline stations to rent to Energy and Retail division of NGFC to get a fixed return on their money. Due to this event, NGFC will no longer include NGLP financial statements as part of its consolidated financial statements. The Board approved NGFC resigning as the General Partners effective end of the day May 20, 2016. Thus NGFC will receive the 30% of the share of the gains from NGLP through end of the day May 20, 2016.
However the option the current Limited Partners of NGLP have as of May 20, 2016 to convert 100% of their capital to NGFC shares at $0.30 per shares by March 31, 2017 will stay effective even after NGFC resign as the GP. If this conversion feature was executed by all 14 limited partners then their total capital (if any of them did not withdraw prior to March 31, 2017) of $535,350 could be converted at $0.30 cents per share to 1,784,500 shares of Class A Common Stock of NGFC.
F-20
|
NGFC EQUITIES, INC.
|
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited proforma consolidated financial statements give effect to deconsolidation of NGFC Limited Partnership (NGLP) from NGFC Equities, Inc. (NGFC) consolidated financial statements.
The unaudited pro forma consolidated financial statements have been prepared for illustrative purposes only and are not necessarily indicative of the consolidated financial position or results of operations in future periods or the results that actually would have been realized had NGFC not acted as the General Partner of NGLP and had not filed consolidated financial statements with NGLP during the specified periods. The unaudited pro forma consolidated financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, the historical consolidated financial statements of NGFC included in its Annual Report on Form 10-K for the year ended September 30, 2015 and its Quarterly Report on Form 10-Q for the six months ended March 31, 2016.
The unaudited pro forma combined balance sheet as of March 31, 2016 as well as the unaudited combined statements of operations for the year ended September 30, 2015 and for the six months ended March 31, 2016, presented herein, gives effect to the deconsolidation as if the transaction had occurred as of the balance sheet date for the balance sheet and at the beginning of such period for the statements of operations and includes certain adjustments within the Stockholder’s Equity section that are directly attributable to the transaction.
|
F-21
| | | | | | | |
NGFC EQUITIES, INC. |
UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET |
AS AT MARCH 31, 2016 |
| | | | | | | |
| | Historical | Proforma | Proforma |
| | Consolidated | Adjustments | Final |
ASSETS | | | | | | |
Current assets | | | | | | |
| Cash and cash equivalent | $ | 394,298 | $ | (337,948) | $ | 56,350 |
| Marketable securities | | 242,801 | | (194,238) | | 48,563 |
| Loan receivable related parties | | 687 | | - | | 687 |
| Inventory | | 4,894 | | - | | 4,894 |
| Total current assets | | 642,680 | | (532,186) | | 110,494 |
| | | | | | | |
Fixed assets | | | | | | |
| Software, net | | 3,495 | | | | 3,495 |
| | | | | | | - |
Other assets | | | | | | |
| Investment in NGFC Partnership | | - | | 17,521 | | 17,521 |
| Goodwill | | 361,049 | | - | | 361,049 |
| Customer list-net of amortization | | 95,833 | | - | | 95,833 |
| | | 456,882 | | 17,521 | | 474,403 |
| | | | | | | - |
Total assets | $ | 1,103,057 | $ | (514,665) | $ | 588,392 |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | |
Current liabilities | | | | | | |
| Credit Card payable | $ | 2,384 | $ | - | $ | 2,384 |
| Deferred revenue | | - | | - | | - |
| Loan payable related party | | - | | - | | - |
| Rent payable | | 2,400 | | - | | 2,400 |
| Total current liabilities | | 4,784 | | - | | 4,784 |
| | | | | | | |
Stockholders' equity (deficit) | | | | | | |
| Preferred stock: $.0001 par value; 10,000,000 shares authorized, no shares issued and outstanding | | | | | | |
| Class A Common stock: $.0001 par value; 230,000,000 shares authorized, 18,092,674 and 18,042,674 shares issued and outstanding for the period end | | 1,809 | | | | 1,809 |
| Class B Common stock: $.0001 par value; 60,000,000 shares authorized, 7,000,000 shares issued and outstanding for the period end | | 700 | | | | 700 |
| Additional paid-in capital | | 1,040,187 | | | | 1,040,187 |
| Accumulated deficit | | (558,254) | | 21,463 | | (536,791) |
| Total stockholders' equity (deficit) | | 484,442 | | 21,463 | | 505,905 |
| Non Controlling Interest | | 613,831 | | (536,128) | | 77,703 |
| Total Equity | | 1,098,273 | | | | 583,608 |
| | | | | | | |
Total liabilities and stockholders' equity (deficit) | $ | 1,103,057 | $ | (514,665) | $ | 588,392 |
F-22
| | | | | | | | |
NGFC EQUITIES, INC. |
UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF OPERATIONS |
FOR THE SIX MONTHS ENDED MARCH 31, 2016 |
| | | | | | | | |
| | | Historical | Proforma | Proforma |
| | | Consolidated | Adjustments | Final |
Revenue | | | | | | | |
Sales | | | $ | 144,862 | $ | | $ | 144,862 |
Cost of goods sold | | | | | | |
| Purchases - Parts and Materials | | 54,098 | | | | 54,098 |
| | Total Cost of Goods Sold | | 54,098 | | | | 54,098 |
| | | | | | | | |
| Gross profits | | 90,764 | | | | 90,764 |
| | | | | | | | |
Operating expenses | | | | | | |
| Legal fees | | 4,535 | | | | 4,535 |
| Accounting fees | | 12,700 | | | | 12,700 |
| Officer compensation | | 31,637 | | | | 31,637 |
| Depreciation and amortization | | 25,500 | | | | 25,500 |
| Consulting fees | | 20,250 | | | | 20,250 |
| General and administrative | | 26,420 | | (800) | | 25,620 |
| | Total operating expenses | | 121,042 | | (800) | | 120,242 |
| | | | | | | | |
Loss from operations | $ | (30,278) | $ | 800 | $ | (29,478) |
| | | | | | | | |
Other income | | | | | | | |
| Long term capital loss | | (550) | | | | (550) |
| Realized gain on marketable securities | | 117,085 | | (83,675) | | 33,410 |
| Unrealized loss on marketable securities | | (107,286) | | 83,453 | | (23,833) |
| Dividends received | | 1,109 | | (574) | | 535 |
| | Total other income/(loss) | | 10,358 | | (796) | | 9,562 |
| | | | | | | | |
Net loss | | | (19,920) | | 4 | | (19,916) |
Less: Net income (loss) attributable to the Non Controlling Interest | (24,820) | | (1,419) | | (26,239) |
Net loss attributable to NGFC Shareholders | | (44,740) | | (1,415) | | (46,155) |
| | | | | | | | |
Basic and diluted loss per common share | $ | (0.00) | $ | | $ | (0.00) |
| | | | | | | | |
Basic and diluted weighted average number of common shares outstanding | | 25,046,438 | | | | 25,046,438 |
F-23
| | | | | | |
NGFC EQUITIES, INC. |
UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF OPERATIONS |
FOR THE YEAR ENDED SEPTEMBER 30, 2015 |
| | | | | | |
| Historical | Proforma | Proforma |
| Consolidated | Adjustments | Final |
Revenue | | | | | | |
Sales | $ | 62,429 | | | $ | 62,429 |
Cost of goods sold | | 60,222 | | | | 60,222 |
Gross profits | | 2,207 | | | | 2,207 |
| | | | | | |
Operating expenses | | | | | | |
Legal fees | | 21,457 | | (2,500) | | 18,957 |
Accounting fees | | 12,550 | | | | 12,550 |
Officer compensation | | 62,754 | | | | 62,754 |
Depreciation and amortization | | 30,167 | | | | 30,167 |
Consulting fees | | 166,250 | | | | 166,250 |
General and administrative | | 113,915 | | (401) | | 113,514 |
Total operating expenses | $ | 407,093 | $ | (2,901) | $ | 404,192 |
| | | | | | |
Loss from operations | | (404,886) | | 2,901 | | (401,985) |
| | | | | | |
Other income | | | | | | |
| | | | | | |
Realized gain on marketable securities | | 17,274 | | (10,266) | | 7,008 |
Unrealized loss on marketable securities | | (57,176) | | 28,824 | | (28,352) |
Dividends received | | 333 | | | | 333 |
Total other income | $ | (39,569) | | 18,558 | $ | (21,011) |
| | | | | | |
Net loss | | (444,455) | | 21,459 | | (422,996) |
Less: Net Loss attributable to the Non Controlling Interest | | 19,896 | | (5,346) | | 14,550 |
| | | | | | |
Net loss attributable to NGFC Shareholders | $ | (424,559) | $ | 16,113 | $ | (408,446) |
| | | | | | |
Net loss attributable to NGFC basic and diluted loss per common share | | (0.02) | | | | (0.02) |
| | | | | | |
Basic and diluted weighted average number of common shares outstanding | | 22,137,706 | | | | 22,137,706 |
F-24
NOTES AND ASSUMPTIONS TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The cash and marketable securities adjusted out of historical consolidated Balance Sheet are the balances of NGLP as of March 31, 2016. $17,521 represents $16,721, the amount NGFC has invested in NGLP and $800 that NGLP owes to NGFC for audit and accounting fees. $21,463 adjusted out of the consolidated Balance Sheet is the net accumulated loss of NGLP as of March 31, 2016 and $536,128 represents the total capital of NGLP.
The amounts adjusted out of consolidated Statement of Operations for the six months ended March 31, 2016 mainly the capital gain, dividends and unrealized capital losses belong to NGLP for that period and $800 expenses for audit and accounting expenses. Net loss of $4 for the period has been adjusted along with $1,419, representing losses regarding the loss attributable to the non-controlling interest due to NGLP consolidation.
The amounts adjusted out of consolidated Statement of Operations for the year ended September 30, 2015 also represent the capital gain, dividends and unrealized capital losses belong to NGLP for that period and $400 expenses for audit and accounting expenses and $2,500 of organizational cost. Net loss of $21,459 for the period has been adjusted along with $5,346, representing losses regarding the loss attributable to the non-controlling interest due to NGLP consolidation.
F-25
