HALLADOR ENERGY CO 10-Q

hnrg20200630_10q.htm     Table of Contents   UNITED STATES   SECURITIES AND EXCHANGE COMMISSION   Washington, D.C. 20549      FORM  10-Q   ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934       For the quarterly period ended  September 30, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    Commission file number: 001-34743   “COAL KEEPS YOUR LIGHTS ON” “COAL KEEPS YOUR LIGHTS ON” HALLADOR ENERGY COMPANY ( www.halladorenergy.com )          Colorado (State of incorporation)   84-1014610 (IRS Employer Identification No.)       1183 East Canvasback Drive , Terre Haute , Indiana (Address of principal executive offices)   47802 (Zip Code)    Registrant’s telephone number, including area code: 812 . 299.2800    Securities registered pursuant to Section 12(b) of the Act:   Title of each class   Trading Symbol   Name of each exchange on which registered Common Shares, $.01 par value   HNRG   Nasdaq    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☑ No  ☐   Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☑ No  ☐   Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.    Large accelerated filer ☐   Accelerated filer  ☑ Non-accelerated filer ☐   Smaller reporting company ☑     Emerging growth company  ☐    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☑   As of October 28, 2020, we had 30,465,665 shares of common stock outstanding.     Table of Contents       TABLE OF CONTENTS           PART I - FINANCIAL INFORMATION       ITEM 1. FINANCIAL STATEMENTS (Unaudited) 3     Condensed Consolidated Balance Sheets 3     Condensed Consolidated Statements of Operations 4     Condensed Consolidated Statements of Cash Flows 5     Condensed Consolidated Statements of Stockholders’ Equity 6     Notes to Condensed Consolidated Financial Statements 7     Report of Independent Registered Public Accounting Firm 16     ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17     ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23     ITEM 4. CONTROLS AND PROCEDURES 23     PART II - OTHER INFORMATION 24     ITEM 1A. RISK FACTORS 24     ITEM 4. MINE SAFETY DISCLOSURES 25     ITEM 6. EXHIBITS 25     SIGNATURES 26        2 Table of Contents        PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS    Hallador Energy Company  Condensed Consolidated Balance Sheets  (in thousands, except per share data)  (unaudited)         September 30,     December 31,       2020     2019   ASSETS                 Current assets:                 Cash and cash equivalents   $ 5,302     $ 8,799   Restricted cash (Note 12)     4,243       4,512   Certificates of deposit     —       245   Accounts receivable     15,846       25,580   Prepaid income taxes     —       1,562   Inventory (Note 3)     36,803       28,297   Parts and supplies, net of allowance of $ 274     9,172       11,775   Prepaid expenses     4,771       1,678   Total current assets     76,137       82,448   Property, plant and equipment, at cost:                 Land and mineral rights     115,894       114,722   Buildings and equipment     357,498       351,614   Mine development     89,229       84,160   Total property, plant and equipment, at cost     562,621       550,496   Less - accumulated depreciation, depletion and amortization     ( 250,134 )     ( 220,780 ) Total property, plant and equipment, net     312,487       329,716   Investment in Sunrise Energy (Note 15)     3,293       3,139   Other long-term assets (Note 4)     8,290       10,324   Total Assets   $ 400,207     $ 425,627   LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND STOCKHOLDERS' EQUITY                 Current liabilities:                 Current portion of bank debt, net (Note 5)   $ 34,311     $ 33,044   Current portion of PPP note (Note 5)   $ 2,160     $ —   Accounts payable and accrued liabilities (Note 6)     33,526       31,800   Total current liabilities     69,997       64,844   Long-term liabilities:                 Bank debt, net (Note 5)     105,885       140,594   PPP note (Note 5)     7,840       —   Deferred income taxes     2,228       4,884   Asset retirement obligations     16,476       15,694   Other     4,061       4,081   Total long-term liabilities     136,490       165,253   Total liabilities     206,487       230,097   Redeemable noncontrolling interests (Note 2)     4,000       4,000   Stockholders' equity:                 Preferred stock, $ .10 par value, 10,000 shares authorized; none issued and outstanding     —       —   Common stock, $ .01 par value, 100,000 shares authorized; 30,466 and 30,420 issued and outstanding, respectively     305       304   Additional paid-in capital     103,123       102,215   Retained earnings     86,292       89,011   Total stockholders’ equity     189,720       191,530   Total liabilities, redeemable noncontrolling interests, and stockholders’ equity   $ 400,207     $ 425,627        See accompanying notes.   3 Table of Contents     Hallador Energy Company   Condensed Consolidated Statements of Operations (in thousands, except per share data)  (unaudited)         Three Months Ended September 30,     Nine Months Ended September 30,       2020     2019     2020     2019   REVENUE:                                 Coal sales   $ 64,754     $ 82,883     $ 177,159     $ 239,231   Other operating income (Note 8)     374       213       2,588       5,488   Total revenue     65,128       83,096       179,747       244,719   COSTS AND EXPENSES:                                 Operating costs and expenses     46,570       71,363       131,204       187,783   Depreciation, depletion and amortization     9,315       11,778       30,159       35,612   Asset retirement obligations accretion     348       320       1,024       943   Exploration costs     174       347       635       835   Selling, general and administrative     3,131       2,926       8,787       9,385   Interest (1)     2,329       3,558       10,877       13,546   Asset impairment     1,799       —       1,799       —   Total costs and expenses     63,666       90,292       184,485       248,104                                     INCOME (LOSS) BEFORE INCOME TAXES     1,462       ( 7,196 )     ( 4,738 )     ( 3,385 )                                   INCOME TAX BENEFIT (NOTE 9):                                 Current     ( 74 )     ( 426 )     ( 598 )     ( 577 ) Deferred     ( 387 )     ( 3,047 )     ( 2,657 )     ( 2,741 ) Total income tax benefit     ( 461 )     ( 3,473 )     ( 3,255 )     ( 3,318 )                                   NET INCOME (LOSS)   $ 1,923     $ ( 3,723 )   $ ( 1,483 )   $ ( 67 )                                   INCOME (LOSS) PER SHARE (NOTE 13):                                 Basic and diluted   $ 0.06     $ ( 0.12 )   $ ( 0.05 )   $ ( 0.00 )                                   WEIGHTED AVERAGE SHARES OUTSTANDING                                 Basic and diluted     30,465       30,249       30,436       30,246                                                                       (1) Bank interest     2,709       2,801       8,201       8,746   Non-cash interest:                                 Change in fair value of interest rate swaps valuation     ( 995 )     162       981       3,018   Amortization of debt issuance costs     610       543       1,686       1,628   Other     5       52       9       154   Total non-cash interest     ( 380 )     757       2,676       4,800   Total interest   $ 2,329     $ 3,558     $ 10,877     $ 13,546       See accompanying notes.   4 Table of Contents     Hallador Energy Company   Condensed Consolidated Statements of Cash Flows  (in thousands)   (unaudited)         Nine Months Ended September 30,       2020     2019   OPERATING ACTIVITIES:                 Net loss   $ ( 1,483 )   $ ( 67 ) Deferred income taxes     ( 2,657 )     ( 2,741 ) Equity (income) loss – Sunrise Energy     ( 1,167 )     350   Cash distribution - Sunrise Energy     1,125       —   DD&A     30,159       35,612   Asset impairment     1,799       —   Loss (gain) on sale of assets     38       ( 99 ) Unrealized gain on marketable securities     ( 14 )     ( 334 ) Gain on sale of royalty interests in oil properties     —       ( 2,949 ) Change in fair value of interest rate swaps     981       3,018   Change in fair value of fuel hedge     775       —   Amortization and write off of debt issuance costs     1,686       1,628   Accretion of ARO     1,024       943   Stock-based compensation     927       1,438   Change in current assets and liabilities:                 Accounts receivable     9,742       ( 3,294 ) Inventory     ( 9,247 )     ( 6,455 ) Parts and supplies     2,603       ( 2,396 ) Prepaid income taxes     1,562       992   Prepaid expenses     1,744       3,800   Accounts payable and accrued liabilities     ( 5,488 )     6,877   Cash provided by operating activities   $ 34,109     $ 36,323   INVESTING ACTIVITIES:                 Investment in Sunrise Energy     ( 113 )     —   Capital expenditures     ( 13,991 )     ( 27,269 ) Proceeds from sale of equipment     56       129   Proceeds from sale of royalty interests in oil properties     —       2,949   Proceeds from sale of marketable securities     2,310       —   Maturities of certificates of deposit     245       245   Cash used in investing activities     ( 11,493 )     ( 23,946 ) FINANCING ACTIVITIES:                 Payments on bank debt     ( 40,475 )     ( 34,713 ) Borrowings of bank debt     7,250       18,250   Proceeds from PPP note     10,000       —   Payments of debt issuance costs     ( 1,903 )     ( 1,183 ) Taxes paid on vesting of restricted stock units     ( 18 )     ( 14 ) Dividends paid     ( 1,236 )     ( 3,724 ) Cash used in financing activities     ( 26,382 )     ( 21,384 ) Decrease in cash, cash equivalents, and restricted cash     ( 3,766 )     ( 9,007 ) Cash, cash equivalents, and restricted cash, beginning of period     13,311       20,094   Cash, cash equivalents, and restricted cash, end of period   $ 9,545     $ 11,087   CASH, CASH EQUIVALENTS, AND RESTRICTED CASH CONSIST OF THE FOLLOWING:                 Cash and cash equivalents   $ 5,302     $ 6,361   Restricted cash     4,243       4,726       $ 9,545     $ 11,087                     SUPPLEMENTAL CASH FLOW INFORMATION:                 Cash paid for interest   $ 8,246     $ 8,900   SUPPLEMENTAL NON-CASH FLOW INFORMATION:                 Capital expenditures included in accounts payable and prepaid expense   $ 968     $ 2,018   Right-of-use assets acquired in exchange for operating lease liabilities     645       882          See accompanying notes.   5 Table of Contents     Hallador Energy Company   Condensed Consolidated Statements of Stockholders’ Equity (in thousands)   (unaudited)   Three and Nine Months Ended September 30, 2020                       Additional             Total       Common Stock     Paid-in     Retained     Stockholders'       Shares     Amount     Capital     Earnings     Equity   Balance, June 30, 2020     30,465     $ 305     $ 102,833     $ 84,369     $ 187,507   Stock-based compensation     —       —       291       —       291   Stock issued on vesting of RSUs     2       —       —       —       —   Taxes paid on vesting of RSUs     ( 1 )     —       ( 1 )     —       ( 1 ) Dividends     —       —       —       —       —   Net income     —       —       —       1,923       1,923   Balance, September 30, 2020     30,466     $ 305     $ 103,123     $ 86,292     $ 189,720                                             Balance, December 31, 2019     30,420     $ 304     $ 102,215     $ 89,011     $ 191,530   Stock-based compensation     —       —       927       —       927   Stock issued on vesting of RSUs     72       1       ( 1 )     —       —   Taxes paid on vesting of RSUs     ( 26 )     —       ( 18 )     —       ( 18 ) Dividends     —       —       —       ( 1,236 )     ( 1,236 ) Net loss     —       —       —       ( 1,483 )     ( 1,483 ) Balance, September 30, 2020     30,466     $ 305     $ 103,123     $ 86,292     $ 189,720      Three and Nine Months Ended September 30, 2019                       Additional             Total       Common Stock     Paid-in     Retained     Stockholders'       Shares     Amount     Capital     Earnings     Equity   Balance, June 30, 2019     30,247     $ 302     $ 101,747     $ 155,003     $ 257,052   Stock-based compensation     —       —       426       —       426   Stock issued on vesting of RSUs     3       —       —       —       —   Taxes paid on vesting of RSUs     ( 1 )     —       ( 7 )     —       ( 7 ) Dividends     —       —       —       ( 1,241 )     ( 1,241 ) Net loss     —       —       —       ( 3,723 )     ( 3,723 ) Balance, September 30, 2019     30,249     $ 302     $ 102,166     $ 150,039     $ 252,507                                             Balance, December 31, 2018     30,245     $ 302     $ 100,742     $ 153,830     $ 254,874   Stock-based compensation     —       —       1,438       —       1,438   Stock issued on vesting of RSUs     7       —       —       —       —   Taxes paid on vesting of RSUs     ( 3 )     —       ( 14 )     —       ( 14 ) Dividends     —       —       —       ( 3,724 )     ( 3,724 ) Net loss     —       —       —       ( 67 )     ( 67 ) Balance, September 30, 2019     30,249     $ 302     $ 102,166     $ 150,039     $ 252,507     See accompanying notes.    6 Table of Contents   Table of Contents             Hallador Energy Company Notes to Condensed Consolidated Financial Statements (unaudited)       ( 1 ) GENERAL BUSINESS   The interim financial data is unaudited; however, in our opinion, it includes all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods. The condensed consolidated financial statements included herein have been prepared pursuant to the SEC’s rules and regulations; accordingly, certain information and footnote disclosures normally included in GAAP financial statements have been condensed or omitted.   The results of operations and cash flows for the three and nine months ended September 30, 2020 , are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2020 .  To maintain consistency and comparability, certain 2019 amounts have been reclassified to conform to the 2020 presentation, with no impact to cash provided by operations activities or net income (loss).   Our organization and business, the accounting policies we follow, and other information are contained in the notes to our consolidated financial statements filed as part of our 2019  Annual Report on Form  10 -K. This quarterly report should be read in conjunction with such Annual Report on Form 10 -K.   The condensed consolidated financial statements include the accounts of Hallador Energy Company (hereinafter known as “we, us, or our”) and its wholly-owned subsidiaries Sunrise Coal, LLC (Sunrise) and Hourglass Sands, LLC (Hourglass), and Sunrise’s wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Sunrise is engaged in the production of steam coal from mines located in western Indiana.   New Accounting Standards Issued and Adopted   In August 2018, the FASB issued ASU  2018 - 13,  Fair Value Measurement (Topic 820 ), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (ASU  2018 - 13 ). The amendments in this update modify the disclosure requirements for fair value measurements. For public business entities, the standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We adopted ASU 2018 - 13 effective January 1, 2020. Adoption of ASU 2018 - 13 did not have a material impact on the Company’s condensed consolidated financial statements.   Subsequent Events   We have evaluated all subsequent events through the date the financial statements were issued.  No material recognized or non-recognizable subsequent events were identified.     ( 2 ) LONG-LIVED ASSET IMPAIRMENTS   Long-lived assets are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of the assets may not be recoverable.  The impact of COVID- 19 is being monitored closely, but for the quarter ended September 30, 2020 , there were no material COVID- 19 related impairment charges recorded for long-lived assets.   Carlisle Mine   We recorded an impairment of $ 65.7  million as of December 31, 2019 due to our decision to idle the Carlisle Mine during Q4 2019 .  The impairment included buildings, land, rail, mine development, equipment, and advanced royalties. Buildings, land, and rail were impaired to their estimated salvage value. The remaining salvage value of land and buildings at the Carlisle Mine is estimated at $1.8  million as of September 30, 2020 and December 31, 2019 .   Subsequent to year-end during late Q1 2020 , we determined that it was economically prudent to permanently close the Carlisle Mine. Equipment totaling $ 23  million is being redeployed and will be utilized at the Oaktown mines. No additional impairment costs were recorded during Q1 2020 as a result of the decision to close the Carlisle Mine. Exit and disposal costs to close the mine were $ 1.1  million, which were recorded as current period costs in Q1 and Q2 of  2020 .   7 Table of Contents   Bulldog Reserves   As a result of the Carlisle Mine impairment, we determined that an impairment of the Bulldog Reserves was also necessary.  With the closure of the Carlisle Mine, it became apparent that the likelihood of construction and opening of Bulldog was reduced.  Based on our review, we recorded an impairment of $ 9.2  million as of December 31, 2019 , which included land and advanced royalties, and was a complete impairment of all assets.   Hourglass Sands   We recorded an impairment of $ 2.9 million as of December 31, 2019 , due to softness in the pricing of the frac sand market.  The impairment included inventory, land, mine development, buildings and equipment and was determined using a market approach.  The remaining fair market value of inventory, equipment, and buildings at Hourglass Sands was $ 1.9 million as of  December 31, 2019 .  Due to the continued regression of the frac sand market, in August 2020 we ceased operations of the plant and recorded an impairment of $ 1.8 million for the quarter ended September 30, 2020, which included the remaining inventory and buildings and which was determined using a market approach.     ( 3 ) INVENTORY   Inventory is valued at lower of average cost or net realizable value (NRV).  As of September 30, 2020 , and December 31, 2019 , coal inventory includes NRV adjustments of $ 0.5  million and $ 2.0 million, respectively.     ( 4 ) OTHER LONG-TERM ASSETS (in thousands)       September 30,     December 31,       2020     2019   Advanced coal royalties   $ 6,453     $ 6,105   Marketable equity securities available for sale, at fair value (restricted)*     —       2,296   Other     1,837       1,923   Total other assets   $ 8,290     $ 10,324     * Held by Sunrise Indemnity, Inc., our wholly-owned captive insurance company.     ( 5 ) LONG-TERM DEBT   On April 15, 2020, we executed an amendment to our credit agreement with PNC, administrative agent for our lenders.  The primary purpose of the amendment was to modify the allowable leverage ratio over the term of the loan to increase available liquidity.  As a result of the amendment, our maximum annual capital expenditures are limited to $ 30 million for 2020 , and our dividend is suspended until our leverage ratio falls below 2.0X.   In the first nine months of 2020 , we reduced our bank debt by $ 33  million, which as of September 30, 2020 was $ 147  million.  Bank debt is comprised of term debt ($ 77  million as of September 30, 2020 ) and a $ 120  million revolver ($ 70  million borrowed as of September 30, 2020 ).  The term debt amortization concludes with the final payment in March 2023.   The revolver matures September 2023.   Our debt is recorded at amortized cost, which approximates fair value due to the variable interest rates in the agreement and is collateralized primarily by our assets.   Liquidity   As of September 30, 2020 , we had additional borrowing capacity of $ 47.4  million and total liquidity of $ 52.7  million.  Liquidity consists of our additional borrowing capacity and cash and cash equivalents.   Fees   Unamortized bank fees and other costs incurred in connection with the initial facility and subsequent amendments totaled $ 7.9  million as of our amendment in April 2020. These costs were deferred and are being amortized over the term of the loan. Unamortized costs as of September 30, 2020 , and December 31, 2019 , were $ 6.7  million and $ 6.5 million, respectively.  Additional costs incurred with the April 15 amendment were $ 1.9 million.   8 Table of Contents   Bank debt, less debt issuance costs, is presented below (in thousands):       September 30,     December 31,       2020     2019   Current bank debt   $ 36,750     $ 34,912   Less unamortized debt issuance costs     ( 2,439 )     ( 1,868 ) Net current portion   $ 34,311     $ 33,044                     Long-term bank debt   $ 110,175     $ 145,238   Less unamortized debt issuance costs     ( 4,290 )     ( 4,644 ) Net long-term portion   $ 105,885     $ 140,594                     Total bank debt   $ 146,925     $ 180,150   Less total unamortized debt issuance costs     ( 6,729 )     ( 6,512 ) Net bank debt   $ 140,196     $ 173,638     Covenants   The credit facility includes a Maximum Leverage Ratio (consolidated funded debt/trailing twelve  months adjusted EBITDA), calculated as of the end of each fiscal quarter for the trailing twelve  months, not to exceed the amounts below:   Fiscal Periods Ending   Ratio   September 30, 2020 and December 31, 2020   3.50 to 1.00   March 31, 2021 and June 30, 2021   3.25 to 1.00   September 30, 2021 and December 31, 2021   3.00 to 1.00   March 31, 2022 and each fiscal quarter thereafter   2.50 to 1.00      As of September 30, 2020 , our Leverage Ratio of 2.46  was in compliance with the requirements of the credit agreement.   The credit facility also requires a Minimum Debt Service Coverage Ratio (consolidated adjusted EBITDA / annual debt service) calculated as of the end of each fiscal quarter for the trailing twelve  months of 1.05 to 1.00 through December 31, 2021, at which time it increases to 1.25 to 1.00 through the maturity of the credit facility.   As of September 30, 2020 , our Debt Service Coverage Ratio of 1.44  was in compliance with the requirements of the credit agreement.   Interest Rate   The interest rate on the facility ranges from LIBOR plus 2.75 % to LIBOR plus 4.00 %, depending on our Leverage Ratio, with a LIBOR floor of 0.50 %.  We entered into swap agreements to fix the LIBOR component of the interest rate at 2.92 % on the declining term loan balance and on $ 53 million of the revolver. At September 30, 2020 , we are paying LIBOR at the swap rate of 2.92 % plus 3.50 % for a total interest rate of 6.42 % on the hedged amount ($ 130  million) and 4 % on the remainder ($ 17  million).   Paycheck Protection Program   On April 16, 2020, we entered into an unsecured promissory note in the amount of $ 10 million under the Paycheck Protection Program (the “PPP Note”). The Paycheck Protection Program was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The PPP note was funded through First Financial Bank, N.A. (the “Lender”).        The annual interest rate on the PPP Note is 1.00%. Monthly principal and interest payments were originally deferred for six months after the date of the loan, but the deferral has been extended to 2021.  The PPP Note contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or Lender, or breaching the terms of the Loan Documents. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, or filing suit and obtaining a judgment against the Company.      9 Table of Contents   Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any covered payments of mortgage interest, rent, and utilities. In the event the PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal. The Company used all proceeds from the PPP Loan to maintain payroll and utility payments.   At September 30, 2020 , the PPP loan totaling $ 10 million is presented as current and long-term liabilities on the condensed consolidated balance sheets based upon the schedule of repayments and excluding any possible forgiveness of the loan.  See Part II Item 1A.Risk Factors of this Quarterly Report on Form 10 -Q for discussion of significant risk factors related to our participation in the Paycheck Protection Program.     ( 6 ) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (in thousands)       September 30,     December 31,       2020     2019   Accounts payable   $ 14,223     $ 16,115   Accrued property taxes     2,898       2,835   Accrued payroll     3,030       2,151   Workers' compensation reserve     3,824       3,446   Group health insurance     1,800       2,500   Fair value of interest rate swaps     3,021       1,714   Other     4,730       3,039   Total accounts payable and accrued liabilities   $ 33,526     $ 31,800        ( 7 ) REVENUE   Revenue from Contracts with Customers   We account for a contract with a customer when the parties have approved the contract and are committed to performing their respective obligations, the rights of each party are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. We recognize revenue when we satisfy a performance obligation by transferring control of a good or service to a customer.   Our revenue is derived from sales to customers of coal produced at our facilities. Our customers typically purchase coal directly from our mine sites or our Princeton Loop, where the sale occurs and where title, risk of loss, and control pass to the customer at that point. Our customers arrange for and bear the costs of transporting their coal from our mines to their plants or other specified discharge points. Nearly all our customers are domestic utility companies. Our coal sales agreements with our customers are fixed-priced, or include price re-openers, fixed-volume supply contracts. Price re-opener and index provisions may allow either party to commence a renegotiation of the contract price at a pre-determined time. Price re-opener provisions require us to negotiate a new price, sometimes within specified ranges of prices. The terms of our coal sales agreements result from competitive bidding and extensive negotiations with customers. Consequently, the terms of these contracts vary by customer.   Coal sales agreements will typically contain coal quality specifications, including BTUs, ash, moisture, and sulfur content among other qualities. Price adjustments are made and billed in the month the coal sale was recognized based on quality standards that are specified in the coal sales agreement and can result in either increases or decreases in the value of the coal shipped.   Disaggregation of Revenue   Revenue is disaggregated by primary geographic markets, as we believe this best depicts how the nature, amount, timing, and uncertainty of our revenue and cash flows are affected by economic factors. 75 % of our coal revenue for the three and nine months ended September 30, 2020 , and 67 % and 69 % for three and nine months ended September 30, 2019 , respectively, was sold to customers in the State of Indiana with the remainder sold to customers in Florida, Georgia, North Carolina, Kentucky, Tennessee, and South Carolina.     10 Table of Contents   Performance Obligations   A performance obligation is a promise in a contract with a customer to provide distinct goods or services. Performance obligations are the unit of account for purposes of applying the revenue recognition standard and therefore determine when and how revenue is recognized. In most of our contracts, the customer contracts with us to provide coal that meets certain quality criteria. We consider each ton of coal a separate performance obligation and allocate the transaction price based on the base price per the contract, increased or decreased for quality adjustments.   We recognize revenue at a point in time, as the customer does not have control over the asset at any point during the fulfillment of the contract. For substantially all of our customers, this is supported by the fact that title and risk of loss transfer to the customer upon loading of the truck or railcar at the mine. This is also the point at which physical possession of the coal transfers to the customer, as well as the right to receive substantially all benefits and the risk of loss in ownership of the coal.   We have remaining performance obligations relating to fixed priced contracts of approximately $ 494  million, which represent the average fixed prices on our committed contracts as of September 30, 2020 . We expect to recognize approximately 57 % of this revenue through 2021, with the remainder recognized thereafter.    We have remaining performance obligations relating to contracts with price reopeners of approximately $ 237  million, which represents our estimate of the expected re-opener price on committed contracts as of September 30, 2020 . We expect to recognize all of this revenue from 2022 - 2027.   The tons used to determine the remaining performance obligations are subject to adjustment in instances of force majeure and exercise of customer options to either take additional tons or reduce tonnage if such option exists in the customer contract.   Contract Balances   Under ASC 606, the timing of when a performance obligation is satisfied can affect the presentation of accounts receivable, contract assets, and contract liabilities. The main distinction between accounts receivable and contract assets is whether consideration is conditional on something other than the passage of time. A receivable is an entity’s right to consideration that is unconditional. Under the typical payment terms of our contracts with customers, the customer pays us a base price for the coal, increased or decreased for any quality adjustments. Amounts billed and due are recorded as trade accounts receivable and included in accounts receivable in our condensed consolidated balance sheets. We do not currently have any contracts in place where we would transfer coal in advance of knowing the final price of the coal sold, and thus do not have any contract assets recorded. Contract liabilities arise when consideration is received in advance of performance. This deferred revenue is included in accounts payable and accrued liabilities in our condensed consolidated balance sheets when consideration is received, and revenue is not recognized until the performance obligation is satisfied. We are rarely paid in advance of performance, but we currently are carrying $ 0.4  million in deferred revenue recorded in our condensed consolidated balance sheets as of September 30, 2020 .     ( 8 ) OTHER OPERATING INCOME (in thousands)       Three Months Ended September 30,     Nine Months Ended September 30,       2020     2019     2020     2019   Equity income (loss) - Sunrise Energy   $ ( 119 )   $ ( 184 )   $ 1,167     $ ( 350 ) Government imposition reimbursements     100       150       300       450   Gain on sale of royalty interests in oil properties           —       —       2,949   Coal storage     127       —       211       —   Miscellaneous     266       247       910       2,439       $ 374     $ 213     $ 2,588     $ 5,488       ( 9 ) INCOME TAXES   For the three and nine months ended September 30, 2020 , the Company utilized a discrete period method to calculate taxes, as it does not believe the annual effective tax rate method represents a reliable estimate given the current uncertainty surrounding COVID- 19.    Our effective tax rate for the three and nine months ended September 30, 2020  and 2019 was ~ 69 % and ~ 98 %, respectively. Historically, our actual effective tax rates have differed from the statutory effective rate primarily due to the benefit received from statutory percentage depletion in excess of tax basis. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income (loss) before income taxes.      11 Table of Contents   On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID- 19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, net operating loss carryback periods, alternative minimum tax credit  (“AMT”) refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, the CARES Act, (i) eliminates the 80% of taxable income limitation by allowing corporate entities to fully utilize NOLs to offset taxable income in 2018, 2019, or 2020, (ii) increases the net interest expense deduction limit to 50% of adjusted taxable income from 30% for tax years beginning January 1, 2019 and 2020 and (iv) allows taxpayers with AMT credits to claim a refund in 2020 for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as originally enacted by the Tax Cuts and Jobs Act in 2017.     ( 10 ) STOCK COMPENSATION PLANS   Non-vested grants at December 31, 2019     488,500   Granted – average weighted share price on grant date was $ 0.90     40,000   Vested – average weighted share price on vesting date was $ 0.68     ( 72,000 ) Forfeited     ( 9,500 ) Non-vested grants at September 30, 2020     447,000     For the three and nine months ended September 30, 2020 , our stock compensation was $ 0.3 million and $ 0.9  million, respectively. For the three and nine months ended September 30, 2019 , our stock-based compensation was $ 0.4  million and $ 1.4  million, respectively.    Non-vested RSU grants will vest as follows:   Vesting Year   RSUs Vesting   2020     106,250   2021     306,750   2022     24,000   2023     10,000         447,000      The outstanding RSUs have a value of $ 0.3  million based on the September 30, 2020, closing stock price of $ 0.65 .   At September 30, 2020  we had 1,379,650 RSUs available for future issuance.     ( 11 ) LEASES   We have operating leases for office space and processing facilities with remaining lease terms ranging from less than one year to approximately five years. As most of the leases do not provide an implicit rate, we calculated the right-of-use assets and lease liabilities using our secured incremental borrowing rate at the lease commencement date. We currently do not have any finance leases outstanding.   Information related to leases was as follows (in thousands):       Three Months Ended September 30,     Nine Months Ended September 30,       2020     2019     2020     2019   Operating lease information:                                 Operating cash outflows from operating leases   $ 50     $ 77     $ 184     $ 234   Weighted average remaining lease term in years     3.43       4.11       3.43       4.11   Weighted average discount rate     6.0 %     6.0 %     6.0 %     6.0 %   12 Table of Contents   Future minimum lease payments under non-cancellable leases as of September 30, 2020 were as follows:   Year   Amount       (In thousands)   2020   $ 50   2021     203   2022     206   2023     174   2024     60   Total minimum lease payments   $ 693   Less imputed interest     ( 48 )           Total operating lease liabilities   $ 645             As reflected on balance sheet:         Other long-term liabilities   $ 645     At September 30, 2020 , and December 31, 2019 , we had approximately $ 645,000 and $ 800,000 , respectively, of right-of-use operating lease assets recorded within “buildings and equipment” on the condensed consolidated balance sheets.     ( 12 ) SELF-INSURANCE   We self-insure our underground mining equipment. Such equipment is allocated among seven mining units dispersed over ten miles. The historical cost of such equipment was approximately $ 273 million as of September 30, 2020 , and December 31, 2019 .   Restricted cash of $ 4.2  million and $ 4.5 million as of September 30, 2020 , and December 31, 2019 , respectively, represents cash held and controlled by a third party and is restricted for future workers’ compensation claim payments.     ( 13 ) INCOME (LOSS) PER SHARE   We compute income (loss) per share using the two -class method, which is an allocation formula that determines income (loss) per share for common stock and participating securities, consisting of outstanding RSUs.   The following table sets forth the computation of net income (loss) allocated to common shareholders (in thousands):       Three Months Ended September 30,     Nine Months Ended September 30,       2020     2019     2020     2019   Numerator:                                 Net income (loss)   $ 1,923     $ ( 3,723 )   $ ( 1,483 )   $ ( 67 ) Less loss (income) allocated to RSUs     ( 28 )     93       23       —   Net income (loss) allocated to common shareholders   $ 1,895     $ ( 3,630 )   $ ( 1,460 )   $ ( 67 )    13 Table of Contents     ( 14 ) FAIR VALUE MEASUREMENTS   We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:   Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Our marketable securities are Level 1 instruments.   Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. We have no Level 2 instruments.   Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). Our Level 3 instruments are comprised of fuel hedges and interest rate swaps.  The fair values of our hedges and swaps were estimated using discounted cash flow calculations based upon forward fuel prices and interest-rate yield curves.  The notional values of our two interest rate swaps were $ 53 million and $ 86  million as of September 30, 2020 , both with maturities of May 2022.  Fuel hedges include 1.4  million gallons of diesel fuel that are subject to pricing fluctuations with a minimum of $1.79/gallon and a maximum of $2.00/gallon through December 2021.   Although we utilize third -party broker quotes to assess the reasonableness of our prices and valuation, we do not have sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2.   The following table summarizes our financial assets and liabilities measured on a recurring basis at fair value at September 30, 2020 and December 31, 2019 by the respective level of the fair value hierarchy (in thousands):       Level 1     Level 2     Level 3     Total   December 31, 2019                                 Assets:                                 Fuel hedge   $ —     $ —     $ 25     $ 25   Marketable securities - restricted     2,296       —       —       2,296       $ 2,296     $ —     $ 25     $ 2,321   Liabilities:                                 Interest rate swaps   $ —     $ —     $ 3,825     $ 3,825                                     September 30, 2020                                 Liabilities:                                 Fuel hedge     —       —       750       750   Interest rate swaps     —       —       4,806       4,806       $ —     $ —     $ 5,556     $ 5,556        The table below highlights the change in fair value of the fuel hedges and interest rate swaps which are based on a discounted future cash flow model (in thousands):   Ending balance, December 31, 2019*   $ ( 3,800 ) Change in estimated fair value     ( 1,756 ) Ending balance, September 30, 2020*   $ ( 5,556 )   *Recorded in accounts payable and accrued liabilities and other liabilities in the Condensed Consolidated Balance Sheets.   14 Table of Contents     ( 15 ) EQUITY METHOD INVESTMENTS   We own a 50 % interest in Sunrise Energy, LLC, which owns gas reserves and gathering equipment with plans to develop and operate such reserves. Sunrise Energy also plans to develop and explore for oil, gas, and coal-bed methane gas reserves on or near our underground coal reserves. The carrying value of the investment included in our condensed consolidated balance sheets as of September 30, 2020 , and December 31, 2019 , was $ 3.3  million and $ 3.1 million, respectively.      15 Table of Contents       REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM         To the Board of Directors and Stockholders   Hallador Energy Company   RESULTS OF REVIEW OF INTERIM CONDENSED FINANCIAL STATEMENTS   We have reviewed the condensed consolidated balance sheet of Hallador Energy Company (the "Company") and subsidiaries as of September 30, 2020, and 2019, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2020 and 2019, the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2020 and 2019, the condensed consolidated statement of stockholders’ equity for the three-month and nine-month periods ended September 30, 2020 and 2019, and the related notes (collectively referred to as the "interim financial statements"). Based on our review, we are not aware of any material modifications that should be made to the interim financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.   BASIS FOR REVIEW RESULTS   These interim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with the standards of the Public Company Oversight Board (United States) ("PCAOB"). We are a public accounting firm registered with the 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.    A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.   /s/ Plante & Moran, PLLC   Denver, Colorado   November 2, 2020   16 Table of Contents   ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   THE FOLLOWING DISCUSSION UPDATES THE MD&A SECTION OF OUR 2019 ANNUAL REPORT ON FORM 10-K AND SHOULD BE READ IN CONJUNCTION THEREWITH.   Our condensed consolidated financial statements should also be read in conjunction with this discussion. The following analysis includes a discussion of metrics on a per ton basis derived from the condensed consolidated financial statements, which are considered non-GAAP measurements.  These metrics are significant factors in assessing our operating results and profitability.   IMPACT OF COVID-19   We continue to face uncertainty regarding the evolving impact of the COVID-19 pandemic.  The State of Indiana, where our operations are located, issued a shelter in place order from March 24, 2020, to May 4, 2020. The State deemed our operations necessary and essential, and we were allowed to operate as a supplier to critical power infrastructure. Below is an outline of some of the actions we have taken to address the challenges the COVID-19 pandemic has brought. We continue to monitor the ongoing pandemic and note that if conditions deteriorate in the future, it could result in further negative impact on our results of operations, financial position, and liquidity.     I.   Sales – The global shelter in place response to the COVID–19 pandemic led to an unexpected and dramatic reduction in power demand, primarily during the second quarter 2020.  As expected, we experienced shipment delays in the second quarter as our customers adjusted their inventory levels.  We have worked closely with all of our customers and feel comfortable that all will honor their contracts, most of which have increased shipments in the third quarter and are expected to continue to do so in the fourth quarter.     II.   Production – To date, our operations have performed well considering the additional burdens of operating while working to comply with CDC health and safety guidelines. However, we may experience production interruptions should a significant number of our employees or our suppliers' employees become infected with COVID-19. Our inventory levels rose in the first half of the year, but shipments have increased, and our inventory levels are beginning to decline.     III.   Liquidity and financial flexibility - In Q2 2020, to enhance our liquidity and financial flexibility in response to COVID-19, we amended our credit facility, suspended our quarterly dividend, and borrowed $10 million under the Paycheck Protection Program as described below.     a.   As of September 30, 2020, our liquidity was $52.7 million and our leverage ratio of 2.46X is comfortably within our covenant of 3.50X.     IV.   Supply chain and distribution network - To date, we have not seen a material disruption in our access to supplies and equipment needed in the production of coal.  In the second and third quarter, we experienced delays in rail services that have started to improve at the end of the third quarter.   OVERVIEW   Considering the challenges we have faced during this unprecedented time, Hallador has performed well. Below are some highlights for the quarter and first nine months of 2020:     I.   Q3 2020 Net Income of $1.9 million, Adjusted EBITDA of $17.1 million     a.   Sales:  During Q3 2020, shipments improved versus Q2 levels.  Looking forward, we expect to defer up to 400,000 tons of 2020 shipments to 2021.  As part of these agreements, we anticipate extending the term of multiple contracts for three additional years.       i.   Coal inventory was reduced by $4.5 million during the quarter.     b.   Production:  Q3 production costs were $29.30 per ton.  Looking out for the health and safety of our employees, and out of an abundance of caution, we experienced weeks during the quarter where up to 25% of our workforce was quarantined at home due to COVID-19 exposure. In spite of those challenges, costs remained within our guidance.     c.   Cash Flow & Debt:  During Q3, we generated $15.8 million in operating cash flow which we utilized to pay down our bank debt by $14 million.      i.   As of September 30, 2020, our bank debt was $147 million, bringing our liquidity to $53 million and reducing our leverage ratio to 2.46X, comfortably within our covenant of 3.5X.   17 Table of Contents   Table of Contents   Reconciliation of GAAP “net income” to non-GAAP “adjusted EBITDA” (in thousands), the most comparable GAAP financial measure.       Three Months Ended     Nine Months Ended       September 30,     September 30,       2020     2019     2020     2019   Net income (loss)   $ 1,923     $ (3,723 )   $ (1,483 )   $ (67 ) Income tax benefit     (461 )     (3,473 )     (3,255 )     (3,318 ) Loss from Hourglass Sands     64       47       205       438   (Income) loss from equity method investments     119       184       (1,167 )     350   DD&A     9,313       11,774       30,151       35,598   Asset impairment     1,799       —       1,799       —   ARO accretion     348       320       1,024       943   Loss (gain) on disposal of assets     38       1       38       (99 ) Loss (gain) on marketable securities     —       14       (14 )     (334 ) Interest Expense     2,329       3,558       10,877       13,546   Other amortization     1,452       1,323       4,274       3,614   Change in fair value of fuel hedges     (138 )     -       775       —   Stock-based compensation     291       426       927       1,438   Adjusted EBITDA   $ 17,077     $ 10,451     $ 44,151     $ 52,109       Management believes that the presentation of such additional financial measures provides useful information to investors regarding our performance and results of operations because these measures when used in conjunction with related GAAP financial measures, (i) provide additional information about our core operating performance and ability to generate and distribute cash flow, (ii) provide investors with the financial and analytical framework upon which management bases financial, operation, compensation, and planning decisions, and (iii) present measurements that investors, rating agencies, and debt holders have indicated are useful in assessing our results.       II.    Solid Sales Position Through 2022         COVID-19 has created a lot of uncertainty in the world, but we are comforted by our strong sales position through 2022.       Contracted     Estimated       tons     Priced   Year   (millions)*     per ton   2020 (Q4)     2.1     $ 40.00   2021     5.0     $ 39.30   2022     5.3     $ 40.20         12.4           _____________ * Contracted tons are subject to adjustment due to the exercise of customer options to either take additional tons or reduce tonnage if such options exist in the customer contract.  Our actual shipments for the remainder of 2020 are estimated to be 1.7 million tons as we expect our customers to defer or carryover 400,000 tons from 2020 to 2021 from the contracted tons noted above.    18 Table of Contents        III.   Amended Credit Facility to Improve Liquidity     a.   In an effort to improve liquidity, on April 15, 2020, we executed an amendment to our credit agreement with PNC, administrative agent for our lenders. The amendment modified our leverage ratios, as disclosed in Note 5 to our condensed consolidated financial statements. The new leverage ratios provided us additional liquidity as the economic uncertainty of the next few months and quarters has the potential to dramatically reduce our liquidity.     i.   As a result of the amendment, our maximum annual capital expenditures are limited to $30 million for 2020, and our dividend is suspended until our leverage ratio falls below 2.0X.     IV.   Paycheck Protection Program and Payroll Tax Deferral     a.   Due to economic uncertainty as a result of COVID-19, on April 16, 2020, we entered into a promissory note evidencing an unsecured loan in the amount of $10 million made to the Company under the Paycheck Protection Program (the “Loan”).      i.   As noted previously, uncertainty was created as a result of unexpected sales delays due to the impacts of COVID-19.      1.   Starting in March and continuing through Q2, sales were 30% lower than expected.     2.   The receipt of funds under the PPP loan allowed the Company to avoid workforce reduction measures amidst a steep decline in revenue and operating margins.      b.   Prior to the COVID-19 pandemic taking root in the United States, we idled and permanently closed the Carlisle Mine resulting in a reduction in force in Q1 2020.      i.   At September 30, 2020, the PPP loan totaling $10 million is presented as current and long-term liabilities on the condensed consolidated balance sheets based upon the schedule of repayments and excluding any possible forgiveness of the loan. Based on the terms of the loan, after factoring in the reduction in force prior to our application, we expect a portion of the loan to be forgiven following a successful audit by the Small Business Administration (SBA).  We anticipate applying for forgiveness in Q4 2020 with the decision from the SBA as to the amount of forgiveness coming in Q1 or Q2 of 2021.      c.   In June 2020, we started to take advantage of the payroll tax deferral offered by the CARES act.  Through September 2020, we have deferred $0.8 million, but expect to defer approximately $1.6 million for the full year 2020, which will be due and payable in two annual installments at the end of 2021 and 2022.     V.   Signs of Improvement for the Coal Market     a.    Gas prices are increasing     i.   Thus far, Henry Hub natural gas prices have averaged $1.88 for 2020. Looking to next year, the NYMEX gas 2021 forward strip is $3.11. Next year's gas prices are higher as the market anticipates less gas production and stronger LNG exports in 2021. One indicator of less future gas production is the dramatic slowdown in oil and gas drilling.      ii.   Oil and gas rig counts as of October 23, 2020 are 287 vs. the 2018/2019 peak of 1,085, a 74% decline.     iii.   Gas targeted rigs as of October 23, 2020 are 73 vs. the 2018/2019 peak of 198, a 63% decline.     b.   Coal export prices are improving     i.   API 4 is above $60 now and throughout 2021     ii.   API 2 is above $60 in Q4 2021     LONG-LIVED ASSET IMPAIRMENT REVIEW   See Note 2 to our condensed consolidated financial statements.   19 Table of Contents   LIQUIDITY AND CAPITAL RESOURCES     I.   Cash Provided by Operations     a.   As set forth in our condensed consolidated statements of cash flows, cash provided by operations was $34.0 million and $36.3 million for the nine months ended September 30, 2020 and 2019, respectively.     i.   Operating margins from coal decreased during the first nine months of 2020 by $5.3 million when compared to the first nine months of 2019.     1.   Our operating margins were $10.65 per ton in the first nine months of 2020 compared to $8.53 in the first nine months of 2019.     2.   Due in part to the effects of COVID-19, we experienced lower demand in the first nine months of 2020, resulting in sales of 4.4 million tons compared to sales in the first nine months of 2019 of 6.1 million tons.     ii.   The combination of the lower margins offset by changes in working capital items contributed substantially to our decrease in cash from operations compared to 2019.     b.   Our projected capex budget for the remainder of 2020 is $6 million, of which approximately $3.0 million is for maintenance capex.     c.   Cash provided by operations for the remainder of the year is expected to fund our maintenance capital expenditures and debt service, especially as we continue to reduce coal inventories throughout the balance of 2020.     d.   As we continue to monitor the effects of COVID-19, we continue to proactively manage costs and capital expenditures to ensure adequate liquidity until there is more of a sense of economic certainty in the markets in which we operate.     II.   Material Off-Balance Sheet Arrangements     a.   Other than our surety bonds for reclamation, we have no material off-balance sheet arrangements. In the event we are not able to perform reclamation, which is presented as asset retirement obligations (ARO) in our accompanying condensed consolidated balance sheets, we have surety bonds totaling $27 million to pay for ARO.    20 Table of Contents   CAPITAL EXPENDITURES (capex)   For the nine months of 2020, capex was $14.0 million allocated as follows (in millions):   Oaktown – maintenance capex   $ 7.3   Oaktown – investment     6.3   Other     0.4   Capex per the Condensed Consolidated Statements of Cash Flows   $ 14.0      Quarterly coal sales and cost data (in thousands, except per ton and percentage data) are provided below. Per ton calculations below are based on tons sold.   All Mines   4th 2019     1st 2020     2nd 2020     3rd 2020     T4Qs   Tons produced     2,122       1,701       1,468       1,234       6,525   Tons sold     2,015       1,526       1,244       1,585       6,370   Coal sales   $ 78,205     $ 61,932     $ 50,473     $ 64,754     $ 255,364   Average price/ton   $ 38.81     $ 40.58     $ 40.57     $ 40.85     $ 40.09   Wash plant recovery in %     74 %     74 %     76 %     71 %         Operating costs   $ 60,082     $ 48,334     $ 36,001     $ 46,444     $ 190,861   Average cost/ton   $ 29.82     $ 31.67     $ 28.94     $ 29.30     $ 29.96   Margin   $ 18,123     $ 13,598     $ 14,472     $ 18,310     $ 64,503   Margin/ton   $ 8.99     $ 8.91     $ 11.63     $ 11.55     $ 10.13   Capex   $ 8,264     $ 5,999     $ 4,006     $ 3,995     $ 22,264   Maintenance capex   $ 4,115     $ 3,470     $ 2,578     $ 1,365     $ 11,528   Maintenance capex/ton   $ 2.04     $ 2.27     $ 2.07     $ 0.86     $ 1.81     All Mines   4th 2018     1st 2019     2nd 2019     3rd 2019     T4Qs   Tons produced     1,938       2,205       2,003       1,891       8,037   Tons sold     2,219       2,130       1,807       2,118       8,274   Coal sales   $ 89,019     $ 85,235     $ 71,113     $ 82,883     $ 328,250   Average price/ton   $ 40.12     $ 40.02     $ 39.35     $ 39.13     $ 39.67   Wash plant recovery in %     68 %     73 %     71 %     70 %         Operating costs   $ 69,364     $ 62,271     $ 53,915     $ 71,372     $ 256,922   Average cost/ton   $ 31.26     $ 29.24     $ 29.84     $ 33.70     $ 31.05   Margin   $ 19,655     $ 22,964     $ 17,198     $ 11,511     $ 71,328   Margin/ton   $ 8.86     $ 10.78     $ 9.52     $ 5.43     $ 8.62   Capex   $ 8,996     $ 8,840     $ 9,448     $ 8,981     $ 36,265   Maintenance capex   $ 7,186     $ 6,672     $ 6,164     $ 5,537     $ 25,559   Maintenance capex/ton   $ 3.24     $ 3.13     $ 3.41     $ 2.61     $ 3.09          2020 vs. 2019 (first nine months)    For the first nine months of 2020, we sold 4,355,000 tons at an average price of $40.68/ton. For the first nine months of 2019, we sold 6,055,000 tons at an average price of $39.51/ton. The increase in average price per ton was expected and is the result of our changing contract mix caused by the expiration of contracts and acquisition of new contracts.  The decrease in tons sold is related to the effects of COVID-19 resulting in lower customer demand, our contracted position coming into 2020, and lower natural gas prices further reducing coal demand.  We expect to ship a majority of the remaining contracted tons during the last three months of the year or defer to 2021.    Operating costs for all of our active coal mines averaged $30.03/ton and $30.98/ton for the nine months ended September 30, 2020 and 2019, respectively. Oaktown costs over that same period were $28.59 and $29.96, respectively. The lower costs are a result of the closure of the Carlisle Mine in February allowing us to focus our efforts on our lower cost Oaktown mines. For the remainder of 2020, we expect operating costs for our operating Oaktown mines to be $29-$30/ton.    We expect operating costs associated with the idled Prosperity mine to be $0.3 million for the remainder of 2020. Prosperity operating costs were $0.8 million during the nine months ended September 30, 2020.   21 Table of Contents   We expect operating costs associated with the closed Carlisle mine to be $0.3 million for the remainder of 2020. We estimate that we incurred approximately $1.1 million of exit and disposal costs during the first nine months of 2020.    Other operating income decreased $2.9 million in the first nine months of 2020 when compared to 2019. The largest contributor to this decrease was the income from the sale of overriding royalty interests in certain oil-producing properties for $2.9 million in the first half of 2019. Our investment in Sunrise Energy contributed $1.2 million to income in 2020 but incurred a loss of $0.4 million in 2019. Other items contributing to the decrease related to the sale of scrap metal and other non-producing assets in 2019.    DD&A decreased $5.5 million in the first nine months of 2020 when compared to 2019. A portion of our assets are depreciated based on raw production, which has decreased in 2020, thus as production decreases, so does our DD&A.    SG&A expenses decreased $0.6 million during the first nine months of 2020 when compared to 2019.  The decrease is a result of lower payroll, commissions, and consulting fees as sales and project activity have declined compared to last year due to COVID-19.  We expect SG&A for the remainder of 2020 to be $3 million.    Interest expense decreased approximately $2.7 million in the first nine months of 2020 when compared to 2019. The change in estimated fair value of our interest rate swap agreement resulted in a reduction in non-cash expense of $2.0 million in 2020 when compared to 2019. The remaining decrease of $0.7 million is a result of lower interest rates due to our amended credit agreements in September 2019 and April 2020 and our continued reduction in debt.   Our Sunrise Coal employees and contractors totaled 658 at September 30, 2020, compared to 923 at September 30, 2019, and 907 at December 31, 2019. The decrease in our headcount was due primarily to the closure of the Carlisle Mine in February 2020.     2020 v. 2019 (third quarter)   For the third quarter 2020, we sold 1,585,000 tons at an average price of $40.85/ton.  For the third quarter 2019 we sold 2,118,000 tons at an average price of $39.13/ton.  The increase in average price per ton was expected and is the result of our changing contract mix caused by the expiration of contracts and acquisition of new contracts. As noted above, the decrease in tons sold was due to the effects of COVID-19 resulting in lower customer demand, our contracted position for 2020, and lower natural gas prices further reducing coal demand.  We expect to ship a majority of the remaining contracted tons during the last three months of the year or defer to 2021.   Operating costs for all coal mines averaged $29.30/ton in 2020 and $33.70/ton in 2019. Oaktown costs over that same period were $28.65 and $32.60, respectively. Our operating costs for the quarter are within our prior guidance of $29-$30/ton as we continue to experience solid production in spite of the COVID-19 pandemic. Costs are lower than last year due to the closure of the Carlisle Mine in February 2020 allowing us to focus our efforts on our lower cost Oaktown mines. Prosperity operating costs were $0.3 million during the three months ended September 30, 2020.   DD&A decreased approximately $2.5 million in the third quarter of 2020 when compared to the third quarter of 2019. A portion of our assets are depreciated based on raw production, which has decreased in 2020, thus as production decreases, so does our DD&A.   SG&A expenses increased $0.2 million during the third quarter of 2020 when compared to the third quarter of 2019. The increase is a result of additional business development activities in the quarter.   Interest expense decreased approximately $1.2 million in the third quarter of 2020 when compared to the third quarter of 2019. The change in estimated fair value of our interest rate swap agreement resulted in a reduction in non-cash expense of $1.0 million in 2020 when compared to 2019.       EARNINGS (LOSS) PER SHARE       4th 2019     1st 2020     2nd 2020     3rd 2020   Basic and diluted   $ (1.95 )   $ (0.12 )   $ 0.01     $ 0.06         4th 2018     1st 2019     2nd 2019     3rd 2019   Basic and diluted   $ 0.09     $ 0.23     $ (0.11 )   $ (0.12 )    INCOME TAXES   Our effective tax rate (ETR) is estimated at ~69% and ~98% for the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020, the Company utilized a discrete period method to calculate taxes, as it does not believe the annual effective tax rate method represents a reliable estimate given the current uncertainty surrounding COVID-19.  Our ETR differs from the statutory rate due primarily to statutory depletion in excess of tax basis, which is a permanent difference. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income (loss) before income taxes.     22 Table of Contents   GOVERNMENT IMPOSITION REIMBURSEMENTS   Some of our legacy coal contracts allow us to pass on to our customers certain costs incurred resulting from changes in costs to comply with mandates issued by Mine Safety and Health Administration (MSHA) or other government agencies. After applying the provisions of ASU 2014-09, as of September 30, 2020, we do not consider unreimbursed costs from our customers related to these compliance matters to be material and have constrained such amounts and will recognize them when they can be estimated with reasonable certainty.   RESTRICTED STOCK GRANTS   See “Item 1. Financial Statements - Note 10. Stock Compensation Plans” for a discussion of RSUs.   CRITICAL ACCOUNTING ESTIMATES   We believe that the estimates of our coal reserves, our interest rate swaps, our deferred tax accounts, and the estimates used in our impairment analysis are our critical accounting estimates.   The reserve estimates are used in the DD&A calculation and our internal cash flow projections. If these estimates turn out to be materially under or over-stated, our DD&A expense and impairment test may be affected.   The fair value of our interest rate swaps is determined using a discounted future cash flow model based on the key assumption of anticipated future interest rates and related credit adjustment considerations.   We have analyzed our filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. We identified our federal tax return and our Indiana state tax return as “major” tax jurisdictions. We believe that our income tax filing positions and deductions would be sustained on audit and do not anticipate any adjustments that will result in a material change to our consolidated financial position.   ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   No material changes from the disclosure in our 2019 Annual Report on Form 10-K.   ITEM 4. CONTROLS AND PROCEDURES   DISCLOSURE CONTROLS   We maintain a system of disclosure controls and procedures that are designed for the purpose of ensuring that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our CEO, CFO, and CAO as appropriate to allow timely decisions regarding required disclosure.   As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our CEO, CFO, and CAO of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our CEO, CFO, and CAO concluded that our disclosure controls and procedures are effective.   There have been no changes to our internal control over financial reporting during the quarter ended September 30, 2020, that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.   23 Table of Contents   PART II - OTHER INFORMATION   ITEM 1A. RISK FACTORS   Our activities have been and will continue to be adversely affected by the global outbreak of the novel coronavirus (COVID-19), which may prevent us from meeting our targeted production levels, negatively impact our customers’ demand for coal and their ability to honor or renew contracts, adversely affect the health and welfare of Company personnel, prevent our vendors and contractors from performing normal and contracted activities, and negatively affect our liquidity and results of operations.    The recent outbreak of COVID-19, which was first detected in Wuhan, China in December 2019 and declared a pandemic by the World Health Organization in March 2020, could have a material and adverse effect on our business, financial condition, and results of operations. The outbreak has resulted and may continue to result in disruptions to economic and industrial activity worldwide.    In addition to the potential impact on coal demand and volatility in coal prices, COVID-19 may result in disruptions or restrictions on our employees’ ability to operate our coal mines in the ordinary course of business, which would restrict our production capacity. Similarly, we cannot predict how, if at all, the outbreak will affect our suppliers’ ability to provide the mining materials and equipment we require. If our production capacity or our ability to meet our supply needs is affected, our business and our financial results could be materially and adversely affected. Finally, the COVID-19 pandemic has substantially affected national and international financial markets, which could affect our ability to obtain financing for our business, severely limiting liquidity and credit availability.    The COVID-19 pandemic may also have the effect of heightening many of the other risks described in Item 1A, “Risk Factors” of our annual report on Form 10-K for the year ended December 31, 2019, including, but not limited to, those relating to coal prices; economic and market conditions; decreases in coal consumption; disruptions in the availability of mining and other industrial supplies; changes in purchasing patterns of our customers and their effects on our coal supply agreements; our ability to obtain financing and insurance upon favorable terms; among others.    The extent to which COVID-19 will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the geographic spread of the virus, the severity of the disease, the duration of the outbreak, the actions that may be taken by various governmental authorities in response to the outbreak, and the impact on the U.S. or global economy. As a result, at the time of this filing, it is impossible to predict the overall impact of COVID-19 on our business, liquidity, capital resources, and financial results.   The SBA continues to develop and issue new and updated guidance regarding the PPP loan application process, including guidance regarding required borrower certifications and requirements for forgiveness of loans made under the program. We continue to track the guidance as it is released and assess various aspects of its application as necessary based on the guidance. However, given the evolving nature of the guidance, we cannot give any assurance that the anticipated PPP loan will be forgiven in whole or in part.   The PPP loan application required us to certify that the current economic uncertainty made the PPP loan request necessary to support our ongoing operations. While we made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria and that our receipt of the PPP loan is consistent with the broad objectives of the Paycheck Protection Program of the CARES Act, the certification described above does not contain any objective criteria and is subject to interpretation. In addition, the SBA has stated that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If despite our good faith belief that we satisfied all eligibility requirements for the PPP loan, we are found to have been ineligible to receive the PPP loan or in violation of any of the laws or regulations that apply to us in connection with the PPP loan, including the False Claims Act, we may be subject to penalties, including significant civil, criminal and administrative penalties and could be required to repay the PPP loan. In the event that we seek forgiveness of all or a portion of the PPP loan, we will also be required to make certain certifications that will be subject to audit and review by governmental entities and could subject us to significant penalties and liabilities if found to be inaccurate. In addition, our receipt of the PPP loan may result in adverse publicity and damage to our reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources. Any of these events could harm our business, results of operations, and financial condition.   On April 30, 2020, we received a letter from the Listing Qualifications Department of the NASDAQ Stock Market LLC (“Nasdaq”) stating that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) because the minimum bid price of the Company’s common stock on the Nasdaq Capital Market had closed below $1.00 per share for 30 consecutive business days. The notification letter has no immediate effect on the Company’s common stock Nasdaq listing or trading.   Due to the market disruption caused by the ongoing COVID-19 pandemic, Nasdaq has tolled the requirement for meeting the minimum bid price until September 30, 2020. As such, the Company has 180 days from July 1, 2020, or until December 28, 2020, to achieve compliance with the minimum bid price requirement. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for at least ten consecutive business days before December 28, 2020, and in such case, Nasdaq will provide the Company with written confirmation of compliance.   On December 28, 2020, if the Company has not regained compliance, the Company may be eligible for additional time to regain compliance.  To qualify, the Company will need to meet all of the other continued listing requirements for The Nasdaq Capital Market (with the exception of the minimum bid price requirement) and notify Nasdaq of the Company’s intention to cure the deficiency. At that time, the Company may be granted an additional 180 calendar days to regain compliance. If the Company is not eligible for an additional compliance period at that time, Nasdaq will provide the Company with written notification that the Company’s common stock will be subject to delisting.   The Company intends to monitor the bid price of the Company’s common stock and will consider available options to regain compliance with the listing requirements.  There can be no assurance that the Company will be able to restore compliance with the minimum bid requirement or maintain compliance with the other listing requirements.     24 Table of Contents   ITEM 4. MINE SAFETY DISCLOSURES   Safety is a core value for us and our subsidiaries. As such, we have dedicated a great deal of time, energy, and resources to creating a culture of safety. We are proud of the mine rescue team at Sunrise Coal, who placed 2nd overall in the National Mine Rescue contest held in Lexington, Kentucky in September 2019. We would also like to recognize Willie Hamilton, who finished second in the nation on pre-shift and Steve Earle, who was first in Indiana on bench.    See Exhibit 95 to this Form 10-Q for a listing of our mine safety violations.   ITEM 6.    EXHIBITS   15.1 * * Letter Regarding Unaudited Interim Financial Information – Plante Moran 31.1 *   SOX 302 Certification - President and Chief Executive Officer 31.2 *   SOX 302 Certification - Chief Executive Officer 31.3 *   SOX 302 Certification - Chief Accounting Officer 32*   SOX 906 Certification  95.1*   Mine Safety Disclosures 101.INS*   Inline XBRL Instance Document 101.SCH*   Inline XBRL Schema Document 101.CAL*   Inline XBRL Calculation Linkbase Document. 101.LAB*   Inline XBRL Labels Linkbase Document. 101.PRE*   Inline XBRL Presentation Linkbase Document. 101.DEF*   Inline XBRL Definition Linkbase Document. 104*   Cover Page Interactive Data File (embedded with the Inline XBRL document) *Filed Herewith         25 Table of Contents   SIGNATURES   Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.       HALLADOR ENERGY COMPANY                   Date: November 2, 2020   /S/ LAWRENCE D. MARTIN     Lawrence D. Martin, CFO                   Date: November 2, 2020   /S/ R. TODD DAVIS     R. Todd Davis, CAO      26