- Quarterly Report (10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

or

 

¨	Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to              .

Commission file number 0-26509

NATIONAL COAL CORP.

(Exact name of registrant as specified in its charter)

 

Florida		65-0601272
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

8915 George Williams Road

Knoxville, TN 37923

(Address of principal executive offices, zip code)

[phone]

(Registrant’s telephone number, including area code)

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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

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

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨   (Do not check if smaller reporting company)		Smaller reporting company		x

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

As of November 15, 2010 the issuer had 8,545,765 shares of common stock, par value $.0001 per share, issued and outstanding.

 

 

 

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National Coal Corp.

Table of Contents

 

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)			2
Condensed Consolidated Balance Sheets at September 30, 2010 and December 31, 2009			2
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009			3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009			4
Notes to Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			36
Item 4T. Controls and Procedures			36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings			37
Item 1A. Risk Factors			37
Item 5. Other Information			38
Item 6. Exhibits			40

 

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PART I: FINANCIAL INFORMATION

 

Item 1.

Financial Statements

National Coal Corp.

Condensed Consolidated Balance Sheets

(Unaudited)

 

		September 30, 2010				December 31, 2009
Assets
Current Assets:
Cash and cash equivalents		$	3,136,237			$	1,185,725
Accounts receivable, net			469,035				366,680
Inventory			2,119,656				1,403,972
Prepaid and other current assets			733,311				1,550,919
Total Current Assets			6,458,239				4,507,296
Property, plant, equipment and mine development, net			23,006,694				40,298,450
Deferred financing costs			107,130				890,048
Restricted cash			3,707,059				6,211,637
Other non-current assets			847,044				906,097
Total Assets		$	34,126,166			$	52,813,528
Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable		$	4,539,504			$	11,551,663
Accrued expenses			2,189,591				1,065,355
Borrowings under short-term line of credit			—				3,000,000
Current maturities of long - term debt			42,398,865				42,372,933
Current installments of obligations under capital leases			148,168				1,237,358
Current portion of asset retirement obligations			98,528				98,528
Total Current Liabilities			49,374,656				59,325,837
Long - term debt, less current maturities, net of discount			12,289				270,291
Obligations under capital leases, less current installments			27,380				140,958
Asset retirement obligations, less current portion			3,579,928				3,790,212
Deferred revenue			1,000,000				1,000,000
Other non-current liabilities			799,327				589,139
Total Liabilities			54,793,580				65,116,437
Stockholders’ Deficit:
Preferred stock, $.0001 par value; 10 million shares authorized; no shares issued or outstanding			—				—
Common Stock, $.0001 par value; 120 million shares authorized; 8,545,765 and 8,578,473 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively			855				858
Additional paid - in capital			117,041,538				116,194,411
Accumulated deficit			(137,709,807)				(128,498,178)
Total Stockholders’ Deficit			(20,667,414)				(12,302,909)
Total Liabilities and Stockholders’ Deficit		$	34,126,166			$	52,813,528

The Condensed Consolidated Balance Sheet as of December 31, 2009 was derived from Audited Financial Statements

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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National Coal Corp.

Condensed Consolidated Statements of Operations

(Unaudited)

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2010				2009				2010				2009
Revenues:
Coal sales		$	8,820,390			$	21,483,618			$	35,077,102			$	62,325,476
Other revenues			845,811				637,181				1,388,699				2,400,759
Total revenues			9,666,201				22,120,799				36,465,801				64,726,235
Operating expenses:
Cost of coal sales (exclusive of depreciation, depletion, amortization and accretion)			8,960,772				20,028,882				33,388,620				58,295,500
Cost of services (exclusive of depreciation, depletion, amortization and accretion)			57,682				608,274				85,241				2,316,948
Depreciation, depletion, amortization and accretion			1,272,021				2,392,606				4,340,224				7,528,951
Gain on asset disposal, net			(77,983	)			—				(2,533,732	)			—
General and administrative			1,647,041				1,821,731				5,481,813				5,247,932
Total operating expenses			11,859,533				24,851,493				40,762,166				73,389,331
Loss from continuing operations			(2,193,332	)			(2,730,694	)			(4,296,365	)			(8,663,096	)
Other income (expense):
Interest expense			(1,498,769	)			(1,910,496	)			(4,762,493	)			(5,037,908	)
Interest income			1,376				65,175				6,132				222,281
Other			(6,003	)			39,324				(158,904	)			63,944
Other income (expense), net			(1,503,396	)			(1,805,997	)			(4,915,265	)			(4,751,683	)
Loss from continuing operations before income taxes			(3,696,728	)			(4,536,691	)			(9,211,630	)			(13,414,779	)
Income tax benefit			—				—				—				—
Loss from continuing operations			(3,696,728	)			(4,536,691	)			(9,211,630	)			(13,414,779	)
Income (loss) from discontinued operations, net of taxes			—				3,872,741				—				(1,485,157	)
Net loss		$	(3,696,728	)		$	(663,950	)		$	(9,211,630	)		$	(14,899,936	)
Loss per common share from continuing operations - basic and diluted		$	(0.43	)		$	(0.53	)		$	(1.08	)		$	(1.58	)
Earnings (loss) per common share from discontinued operations - basic and diluted		$	—			$	0.46			$	—			$	(0.17	)
Loss per common share - basic and diluted		$	(0.43	)		$	(0.07	)		$	(1.08	)		$	(1.75	)
Weighted average common shares outstanding			8,522,417				8,502,360				8,542,714				8,496,936

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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National Coal Corp.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Nine Months Ended September 30,
		2010				2009
Operating Activities
Net loss		$	(9,211,630	)		$	(14,899,936	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Loss from discontinued operations, net of taxes			—				1,485,157
Depreciation, depletion, amortization and accretion			4,340,224				7,528,951
Amortization of deferred financing costs			882,899				688,438
Amortization of debt discount			571,875				500,323
Gain on asset disposals, net			(2,527,729	)			(74,789	)
Settlement of asset retirement obligations			(537,364	)			(41,469	)
Loss on extinguishment of debt			153,060				—
Stock option expense			785,123				1,126,961
Stock issuance in exchange for services			62,000				—
Changes in operating assets and liabilities:
Accounts receivable			(102,355	)			(753,137	)
Inventory			(2,426,231	)			(940,665	)
Prepaid and other current assets			991,102				678,192
Other non - current assets			133,673				158,155
Accounts payable and accrued expenses			724,684				8,865,730
Deferred revenue			—				(1,241,840	)
Other non - current liabilities			210,188				(196,198	)
Net cash flows (used in) provided by operating activities from continuing operations			(5,950,481	)			2,883,873
Net cash flows provided by operating activities from discontinued operations			—				3,676,903
Net cash flows (used in) provided by operating activities			(5,950,481	)			6,560,776
Investing Activities
Capital expenditures			(1,227,979	)			(5,445,127	)
Proceeds from sale of assets			14,029,512				—
Change in restricted cash			607,328				2,419,886
Additions to prepaid royalties			(74,620	)			(64,500	)
Net cash provided by (used in) investing activities from continuing operations			13,334,241				(3,089,741	)
Net cash used in investing activities from discontinued operations			—				(2,153,052	)
Net cash provided by (used in) investing activities			13,334,241				(5,242,793	)
Financing Activities
Proceeds under short-term line of credit			1,500,000				5,000,000
Repayment of short term line of credit			(4,500,000	)			(1,000,000	)
Repayments of long-term debt			(977,439	)			(2,347,374	)
Repayments of obligations under capital leases			(1,202,768	)			(1,555,560	)
Payments for deferred financing costs			(253,041	)			(439,258	)
Net cash flows used in financing activities from continuing operations			(5,433,248	)			(342,192	)
Net cash flows used in financing activities from discontinued operations			—				(823,851	)
Net cash flows used in financing activities			(5,433,248	)			(1,166,043	)
Net increase in cash and cash equivalents			1,950,512				151,940
Cash and cash equivalents at beginning of period			1,185,725				3,908,469
Cash and cash equivalents at end of period		$	3,136,237			$	4,060,409
Supplemental Cash Flow Information
Cash paid during the period for interest from continuing operations		$	2,550,016			$	2,810,643
Cash paid during the period for interest from discontinued operations			—				555,806
Non-cash investing and financing activities from continuing operations:
Financed equipment acquisitions		$	—			$	34,852
Equipment acquired through capital leases			—				336,000
Non-cash investing and financing activities from discontinued operations:
Financed equipment acquisitions		$	—			$	42,848
Asset retirement obligations incurred, acquired or recosted			—				324,332
Interest and fees paid in-kind or financed at National Coal of Alabama, Inc.			—				2,100,000
Accounts payable assumed in asset sale transactions			6,612,605				—

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1 . Business Overview

National Coal Corp. (the “Company”) consists primarily of its two wholly-owned subsidiaries: (i) National Coal Corporation and (ii) NCC Corp. and, until August 3, 2009, its wholly-owned subsidiary National Coal of Alabama, Inc. (“NCA”). The Company principally engages in the business of mining high quality bituminous steam coal in East Tennessee and, until August 3, 2009, North Alabama. Its customers are primarily electric utilities in the Southeastern United States.

On September 27, 2010, the Company entered into an agreement and plan of merger with Ranger Energy Investments, LLC (“Ranger Energy”) and Ranger Coal Holdings, LLC, a wholly owned subsidiary of Ranger Energy (“Merger Sub”), pursuant to which the Company will merge with and into Merger Sub and each outstanding share of the Company’s common stock will be converted into the right to receive $1.00 in cash. If the merger is consummated, the Company will cease to exist and Merger Sub will remain a wholly-owned subsidiary of Ranger Energy. A special meeting of shareholders will be held on December 2, 2010, at which time shareholders will vote on whether to approve the merger.

At September 30, 2010, the Company owned the coal mineral rights to approximately 65,000 acres of land and leased the rights to approximately 14,000 additional acres. The Company’s mining complexes included one active underground mine, one active surface mine, and one preparation plant and unit train loading facility served by the Norfolk Southern (“NS”) railroad. In addition, the Company began construction in July 2010 on a new underground mine near current active operations. As of September 30, 2010, the Company controlled approximately 38.8 million estimated recoverable tons of coal reserves in Tennessee as defined by the SEC Industry Guide 7 as that part of a mineral deposit which could be economically and legally extracted at the time of the reserve determination.

On April 20, 2010, the Company completed an asset sale to Ranger Energy, which included a preparation plant and rail loadout facility located in Devonia, Tennessee, an active underground mine, two inactive mines, related property, plant and equipment used in and located on the Company’s New River Tract operations, coal inventories located on the properties, associated permits and a coal supply agreement, for an aggregate sales price of $11.8 million (the “Ranger Transaction”). Ranger Energy also assumed reclamation liabilities related to the acquired permits and paid the Company $1.9 million in cash which was previously pledged to secure reclamation bonds and other liabilities associated with the permits sold. The $1.9 million of pledged cash will be repaid directly to Ranger Energy by the surety company that issued the Company’s reclamation bonds when the regulatory process of transferring the related mining permits to Ranger Energy is completed.

Additionally, the Company entered into a lease agreement with Ranger Energy to lease mineral rights on approximately 22,000 acres of the New River Tract, with royalties ranging from 6% to 8% of applicable revenues. The Company receives an overriding royalty for each ton of coal sold by Ranger Energy through the coal supply agreement it acquired in the asset sale. As a result of the Ranger Transaction, the Company recorded a loss of $1.3 million during the nine months ended September 30, 2010.

On May 19, 2010, the Company sold the short line railroad owned by the Company’s wholly-owned subsidiary NC Railroad, Inc. for $3.0 million less accounts payable of $0.1 million. The property and equipment sold had a net book value of $3.2 million and resulted in a loss of approximately $0.2 million, which is included in the consolidated statements of operations for the nine months ended September 30, 2010.

On June 30, 2010, the Company’s wholly-owned subsidiary, National Coal Corporation sold a Superior Highwall Mining System for $4.1 million. The assets sold had an immaterial net book value resulting in a gain on the sale of $4.1 million which is included in the consolidated statements of operations for the nine months ended September 30, 2010.

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

During the nine months ended September 30, 2010, the Company’s continuing operations generated total revenues of $36.5 million on the sale of approximately 0.4 million tons of coal. Revenues are derived primarily from the sale of coal to electric utility companies in the Southeastern United States pursuant to long-term contracts or open purchase order arrangements with long-time customers. Georgia Power Company represented approximately 97% of the Company’s continuing operations’ coal revenues for the nine months ended September 30, 2010.

The Company typically sells coal for a specified per ton amount and at a negotiated price pursuant to both short-term contracts and contracts of twelve months or greater. The weighted average selling price per ton is $87.94 and $85.32 on 0.1 million and 0.5 million tons contracted for the remainder of 2010 and fiscal year 2011, respectively. Price adjustment, “price reopener” and other similar provisions in long-term supply agreements may reduce the protection from short-term coal price volatility traditionally provided by such contracts. Any adjustment or renegotiation leading to a significantly lower contract price would result in decreased revenues and lower gross margins, which could have a material adverse effect on the Company’s operating cash flows. Additionally, the Company’s customers may have the ability to delay the timing of their purchases, which could negatively impact operating cash flows. Finally, coal supply agreements also typically contain force majeure provisions allowing temporary suspension of performance by the Company or its customers during the duration of specified events beyond the control of the affected party. A customer declared a force majeure during the first quarter of 2010 resulting in the suspension of shipments. (See Note 2).

Management assumes the Company will meet its contract commitments through a combination of produced tons and purchased coal. Production can be negatively impacted by weather, labor shortages or equipment break-downs. In addition, geological and mining conditions may not be fully identified by available exploration data or may differ from experience in current operations. Further, coal for purchase may not be available, or available only at unfavorable prices. The occurrence of such events can adversely affect production, the cost of sales or both, and could have a materially adverse effect on the Company’s operating cash flows.

During the remainder of 2010, management expects to incur approximately $0.6 million in new capital expenditures for the construction of a new underground mine near its current active operations and $0.2 million to maintain existing assets. The proceeds received from the sale of assets during June 2010 will be the primary source of funding for the new capital expenditures. In prior years, the Company has experienced the unanticipated loss of the use of key equipment, which resulted in lost production and lost revenues. The Company may experience similar mechanical failures in the future, which could have a material adverse effect on its operating cash flows.

2. Going Concern

At September 30, 2010, the Company had cash and cash equivalents of approximately $3.1 million, negative working capital of approximately $42.9 million and a stockholders’ deficit of $20.7 million. The Company has a history of substantial net losses. During the nine months ended September 30, 2010 and 2009, the Company generated net losses from continuing operations of $9.2 million and $13.4 million, respectively. Net cash flow (used in) provided by operating activities from continuing operations was approximately $(6.0) million and $6.6 million during the nine months ended September 30, 2010 and 2009, respectively.

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

During the first quarter of 2010, the Company’s largest customer exercised its rights of force majeure under the Company’s coal supply contract due to freezing weather in the Southeastern United States, which resulted in the suspension of the Company’s shipment of approximately 40,000 tons of coal. While the customer is obligated under its contract to purchase this coal within twelve months after the end of the event, the suspension of these shipments resulted in an immediate reduction in cash receipts of approximately $3.0 million during January and February 2010.

In 2009, the Company concluded that cash generated from operations would not be sufficient to pay interest or principal on its 10.5% Notes due 2010, and the Company began exploring strategic alternatives to improve its liquidity and reduce its debt obligations. The Company engaged the services of a financial advisory firm to evaluate possible strategic and financing transactions. Among these alternatives, the Company has been pursuing a restructuring of its debt, the issuance of common stock in exchange for the purchase and cancellation of its debt, the sale of a portion of the Company’s operating assets, transactions in which the Company would issue preferred or additional common stock for cash, and merger transactions with other coal producers. On September 27, 2010, the Company entered into the agreement and plan of merger with Ranger Energy and Merger Sub, pursuant to which the Company will merge with and into Merger Sub and each outstanding share of the Company’s common stock will be converted into the right to receive $1.00 in cash. The merger must be approved by holders of a majority of the Company’s outstanding shares of common stock at a meeting presently scheduled for December 2, 2010, and the transactions contemplated by the merger agreement are subject to other customary closing conditions. The merger is expected to close prior to December 15, 2010, the maturity date of the Company’s 10.5% Notes due 2010. If the merger does not close prior to such date, the Company will default on its 10.5% Notes due 2010 and most likely need to seek protection from creditors under federal bankruptcy laws.

On April 20, 2010, the Company completed the Ranger Transaction. (See Note 1). Prior to the closing of the Ranger Transaction, Ranger Investments, LLC, a Ranger affiliate, purchased from Centaurus Energy Master Fund, LP $30.3 million of the Company’s 10.5% Notes due 2010 and the Company’s $5.0 million short-term revolving line of credit, of which $4.5 million had been drawn. The Company was in default under the $5.0 million short-term revolving line of credit on the date the Company published its annual financial statements, which was reported on with a “going concern” qualification from the Company’s independent registered public accounting firm. The Company used a portion of the proceeds from the Ranger Transaction on April 20, 2010 to pay the $4.5 million outstanding balance on the revolving line of credit and the line of credit was terminated. As a result of the transaction, the Company recorded a loss on extinguishment of debt of $0.2 million during the second quarter of 2010.

On January 5, 2010, the Company received a deficiency notice from The NASDAQ Stock Market stating that the Company had not met the $1.00 minimum closing bid price requirement for thirty consecutive trading days as required under NASDAQ listing rules. The Company failed to regain compliance with the minimum bid price requirement, and on July 8, 2010 the Company received a notice from The NASDAQ Stock Market indicating that the Company’s common stock would be delisted. On July 13, 2010, the Company requested a hearing with the NASDAQ Listing Qualifications Panel (“Panel”) to review the delisting determination, which oral hearing took place August 5, 2010. On September 29, 2010, the Panel agreed to grant the Company a conditional listing (exemption) for an additional period of time not to exceed 180 days from the date of the delisting notification, or until January 4, 2011, to allow the Company time to complete the merger with Ranger Energy.

On June 16, 2010, the Company was notified by The NASDAQ Stock Market that it was not in compliance with an additional Nasdaq listing requirement because the market value of the Company’s publicly held shares of common stock was less than $15 million for 30 consecutive business days. The Company has 180 calendar days, or until December 13, 2010, to regain compliance with this listing rule.

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

To regain compliance with the minimum value of publicly held shares rule, the market value of the Company’s publicly held shares, based on the closing bid price of its common stock, must equal at least $15 million for a minimum of ten consecutive business days. If the Company does not regain compliance by December 13, 2010, the Nasdaq staff will notify the Company that its common stock will be delisted. In that event and at that time, the Company may appeal Nasdaq’s delisting determination to a Nasdaq Hearings Panel.

These factors, among others, may indicate that the Company will be unable to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

3. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of National Coal Corp. and those of its two wholly-owned operating subsidiaries, National Coal Corporation and NCC Corp. and their respective wholly-owned subsidiaries, NC Railroad, Inc., Jacksboro Coal Company, Inc. and, until August 3, 2009, NCA. NCA is presented as discontinued operations as discussed in Note 4. The statements of operations include NCA through August 3, 2009, the date of foreclosure. All intercompany transactions have been eliminated in consolidation.

The unaudited consolidated financial statements do not include footnotes and certain financial information normally presented annually under accounting principles generally accepted in the United States of America (U.S. GAAP) and should, therefore, be read in conjunction with the Annual Report on Form 10-K of National Coal Corp. for the year ended December 31, 2009. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and nine months ended September 30, 2010 and 2009 are not necessarily indicative of results that can be expected for the fiscal year.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments, and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenues, and expenses at the date of the financial statements and for the periods then ended. On an on-going basis, management evaluates the estimates used, including those related to workers’ compensation, reclamation and mine closure obligations, coal reserve values, income taxes, and contingencies. Estimates are based on historical experience, actuarial estimates, current conditions, and various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

Cash and Cash Equivalents

Cash and cash equivalents are stated at cost. Cash equivalents consist of highly liquid investments with maturities of three months or less when acquired.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Customers are primarily utility companies. Balances are stated net of an allowance for doubtful accounts. The allowance was $0 at September 30, 2010 and December 31, 2009. Bad debts expense, net of recoveries, was $0 during the three and nine months ended September 30, 2010 and 2009.

Inventory

Inventory includes all mined coal, purchased coal and tires. Mined coal is classified as inventory at the point it is extracted, and is valued at the lower of average cost or net realizable value. As of September 30, 2010 and December 31, 2009 the Company reduced the carrying value of its inventories by $336,703 and $39,814, respectively, to state mined coal inventories at net realizable value. Mined coal inventory costs include labor, fuel, equipment costs, and operating overhead. Purchased coal inventory is valued at the lower of average cost or net realizable value. Tires are classified as inventory when purchased and recorded at the lower of average cost or market.

Property, Plant, Equipment and Mine Development

Property and equipment are stated at cost. Maintenance and repairs that do not improve efficiency or extend economic life are expensed as incurred. Plant and equipment are depreciated using the straight-line method over the estimated useful lives of assets which generally range from seven to thirty years for building and plant and one to seven years for equipment. Upon sale or retirement, asset cost and related accumulated depreciation are removed from the accounts and any related gain or loss is reflected in the statement of operations.

Leasing is used for certain capital additions when considered cost effective relative to other capital sources, and is classified as either capital or operating as appropriate. Leased equipment meeting the capital lease criteria of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 840, Accounting for Leases is capitalized and the present value of the related lease minimum payments is recorded as a corresponding asset and liability. Amortization of capitalized leased assets is computed using the straight-line method over the shorter of the estimated useful life or the initial lease term.

Mineral rights represent tangible assets that are recorded at fair value when acquired, including amounts associated with any value beyond proven and probable reserves. Mine development costs are recorded at cost as incurred. The Company’s coal reserves are controlled either through direct ownership or through leasing arrangements which generally last until the recoverable reserves are depleted. Depletion of reserves and amortization of mine development costs is computed using the units-of-production method over the estimated proven and probable recoverable tons.

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If impairment indicators are present and the future undiscounted cash flows are less than the carrying value of the assets, the carrying values are reduced to the estimated fair value.

Deferred Financing Costs

Deferred financing costs represent capitalized expenses associated with the issuance of debt. Deferred financing costs are amortized by the interest method over the life of the associated debt.

Restricted Cash

Restricted cash includes accrued interest and consists principally of money market accounts and certificates of deposit securing surety bonds and letters of credit which collateralize mine reclamation obligations with various federal and state regulatory authorities.

Prepaid Mining Royalties

Certain coal leases require minimum or advance payments which are deferred and charged to cost of sales as coal is extracted and sold. The Company had prepaid royalties of approximately $544,000 and $470,000 at September 30, 2010 and December 31, 2009, respectively, included in other non-current assets in the accompanying balance sheets.

Reclamation and Asset Retirement Obligations

The Surface Mining Control and Reclamation Act of 1977 and similar state statutes require mine properties to be restored in accordance with specified standards. FASB ASC 410, Accounting for Asset Retirement Obligations requires recognition of an asset retirement obligation (“ARO”) for eventual reclamation of disturbed acreage remaining after mining has been completed. The Company records its reclamation obligations on a permit-by-permit basis using requirements as determined by the Office of Surface Mining of the U.S. Department of the Interior (“OSM”). The liability is calculated based upon the reclamation activities remaining after coal removal ceases, assuming that reclamation activities have been contemporaneous within state and federal guidelines during mining. A liability is recorded for the estimated future cost that a third party would incur to perform the required reclamation and mine closure discounted at the Company’s credit-adjusted risk-free rate. A corresponding increase in the asset carrying value of mineral rights is also recorded. The ARO asset is amortized on the units-of-production method over the proven and probable reserves associated with that permit, and the ARO liability is accreted to the expected reclamation date at the Company’s credit-adjusted risk-free rate. These expenses are included in depreciation, depletion, amortization, and accretion in the operating expenses section of the statement of operations.

Stock-based Compensation

The Company’s 2004 Option Plan (the “Plan”) was authorized by the Board of Directors of the Company in March 2004, and amended in January 2005 and June 2010. Under the terms of the Plan, stock options may be granted to officers, directors, employees, and others. At September 30, 2010, 1,500,000 shares of common stock were authorized for issuance under the Plan. Shares subject to awards that expire unexercised or are otherwise terminated, again become available for awards. Upon exercise, stock is issued from unissued or treasury shares. The grant price of an option under the Plan generally may not be less than the fair market value of the common stock subject to such option on the date of grant. Options have a maximum life of ten years and generally vest 25% per year over a four year period. Currently, all stock options issued under the plan are non-statutory.

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

Workers’ Compensation

The Company provides for income replacement and medical treatment for work related injury and occupational disease resulting from coal workers’ pneumoconiosis (Black Lung Disease), as required by federal and state law, through insurance policies with high deductibles. Loss funding provisions for deductibles are based on determinations by independent actuaries or claims administrators.

Revenue Recognition

The Company recognizes revenue when title or risk of loss passes to the common carrier or customer. This generally occurs when coal is loaded onto trains, barges or trucks at one of our loading facilities or at third party facilities. In most cases, the Company negotiates a specific sales contract with each customer, which specifies a fixed price per ton, premiums and penalties for quality variances, a delivery schedule, and payment terms. Contracts range in duration from one to three years.

Revenue is also earned from contract mining services and from royalties based on coal mined by lessees.

Freight Revenue and Costs

Shipping and handling costs paid to third-party carriers and invoiced to coal customers are included in coal sales and cost of sales.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases in accordance with FASB ASC 740, Accounting for Income Taxes . A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in this assessment. 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 income in the period that includes the enactment date of such change.

Comprehensive Loss

The Company’s comprehensive losses as defined by FASB ASC 220, Reporting Comprehensive Income , are the same as the net losses reported.

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

4. Divestitures

New River Tract Divestiture

On April 20, 2010, the Company completed the Ranger Transaction. (See Note 1). The purchase price for the Ranger Transaction was $11.8 million, plus royalty lease payments of 6% to 8% of applicable revenues generated by Ranger Energy for the leased mineral reserves and an overriding royalty for each ton of coal sold by Ranger Energy through the coal supply agreement it acquired in the asset sale. Of the purchase price, $6.6 million was paid by Ranger Energy assuming $6.6 million of accounts payable the Company owed to an affiliate of Ranger Energy. The Company was also required to pay from the sale proceeds at closing the $4.5 million short-term revolving credit facility and the revolving credit agreement was terminated. The Company also received $1.9 million in cash that was previously pledged to secure reclamation bonds and other liabilities associated with the permits sold. The $1.9 million of pledged cash will be repaid directly to Ranger Energy by the surety company that issued the Company’s reclamation bonds when the regulatory process of transferring the related mining permits to Ranger Energy is completed. Net cash proceeds available to the Company as a result of the asset sale and related transactions were $1.4 million.

As a result of the Ranger Transaction on April 20, 2010, the Company recorded a loss of $1.3 million during the nine months ended September 30, 2010.

Alabama Discontinued Operations

The Company acquired its Alabama operations in October 2007, financed principally through the issuance of $60 million of 12% Notes due 2012. On June 26, 2009, NCA was obligated to pay to its debt holders approximately $1.9 million of accrued interest on its 12% Notes due 2012. The date for making the interest payment was extended by the holders of the 12% Notes due 2012 to July 17, 2009, and on July 21, 2009, NCA defaulted on the 12% Notes due 2012 as the interest payment had not been made. On August 3, 2009, the holders of the Company’s 12% Notes due 2012 foreclosed on the outstanding capital stock of NCA, the collateral for the 12% Notes due 2012, and acquired NCA. As a result, NCA is no longer a subsidiary of the Company as of such date. Additionally, the credit agreement provided that upon the acceleration of the entire unpaid balance of the indebtedness, the holders of the 12% Notes due 2012 were entitled to receive the “Make-Whole Amount”, which amount was the present value of all future interest payments with respect to the principal amount of the indebtedness under the agreement. The Make-Whole Amount was approximately $19.8 million. As a result of the transaction, the Company recognized a gain on discontinued operations of $23.5 million during the third quarter of 2009.

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

Revenues and net losses attributable to discontinued operations for the three and nine months ended September 30, 2009 are as follows:

 

		For the Three Months Ended September 30, 2009				For the Nine Months Ended September 30, 2009
Revenues:
Coal sales		$	3,711,748			$	31,308,684
Other revenues			35,501				182,310
Total revenues of discontinued operations			3,747,249				31,490,994
Operating expenses:
Cost of coal sales (exclusive of depreciation, depletion, amortization and accretion)			3,142,701				26,552,576
Depreciation, depletion, amortization and accretion			714,683				4,539,236
General and administrative			149,661				1,327,193
Total operating expenses of discontinued operations			4,007,045				32,419,005
Loss from operations from discontinued operations			(259,796	)			(928,011	)
Other income (expense):
Interest expense			(20,800,209	)			(26,316,924	)
Interest income			521				26,337
Income from joint venture			22,408				173,007
Other			—				(51,381	)
Other income (expense), net from discontinued operations			(20,777,280	)			(26,168,961	)
Loss from discontinued operations before income taxes			(21,037,076	)			(27,096,972	)
Income tax benefit			1,369,388				2,071,386
Loss from discontinued operations, net of taxes			(19,667,688	)			(25,025,586	)
Gain on disposal of discontinued operations, net of taxes of $0			23,540,429				23,540,429
Income (loss) from discontinued operations, net of taxes		$	3,872,741			$	(1,485,157	)

5. Inventory

Inventory attributable to continuing operations consists of the following:

 

		September 30, 2010				December 31, 2009
Coal inventory		$	2,049,511			$	1,357,632
Tire inventory			70,145				46,340
Total Inventory		$	2,119,656			$	1,403,972

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

6. Property, Plant, Equipment and Mine Development, Net

Property, plant, equipment and mine development from continuing operations consist of the following:

 

		September 30, 2010				December 31, 2009
Mining equipment and vehicles		$	37,402,660			$	57,138,852
Land and buildings			3,789,817				5,297,155
Furniture and office equipment			268,220				323,656
Mineral rights			11,125,319				11,125,319
Mine development			4,181,354				8,116,033
Construction in progress			372,180				628,623
			57,139,550				82,629,638
Less accumulated depreciation, depletion and amortization			(34,132,856	)			(42,331,188	)
Total property, plant, equipment and mine development, net		$	23,006,694			$	40,298,450

On April 20, 2010, the Company sold certain property, plant, equipment and mine development from the Company’s New River tract operations (see Note 4).

On May 19, 2010, the Company sold the short line railroad owned by the Company’s wholly-owned subsidiary NC Railroad, Inc for $3.0 million less accounts payable of $0.1 million. The property and equipment sold had a net book value of $3.2 million and resulted in a loss of approximately $0.2 million, which is included in the consolidated statements of operations for the nine months ended September 30, 2010.

On June 30, 2010, the Company’s wholly-owned subsidiary, National Coal Corporation sold a Superior Highwall Mining System for $4.1 million. The assets sold had an immaterial net book value resulting in a gain on the sale of $4.1 million which is included in the consolidated statements of operations for the nine months ended September 30, 2010.

7. Other Non-Current Assets

Other non-current assets from continuing operations are as follows:

 

		September 30, 2010				December 31, 2009
Prepaid mining royalties		$	544,126			$	469,506
Long-term portion of prepaid assets			7,046				130,718
Franchise tax receivable			295,872				305,873
Total other non-current assets		$	847,044			$	906,097

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

8. Accrued Expenses

Accrued expenses from continuing operations consist of the following:

 

		September 30, 2010				December 31, 2009
Accrued interest		$	1,274,000			$	196,000
Accrued payroll and related taxes			214,042				204,140
Accrued federal, state and local taxes			227,933				318,431
Accrued other			473,616				346,784
Total accrued expenses		$	2,189,591			$	1,065,355

9. Debt and Financing Arrangements

Long-term debt obligations of the Company, excluding capital leases, from continuing operations consist of the following:

 

		September 30, 2010				December 31, 2009
10.5% Senior Secured Notes due 2010		$	42,000,000			$	42,000,000
Equipment loans and installment purchase obligations			545,266				1,284,210
Insurance premium financing			—				65,000
			42,545,266				43,349,210
Unamortized discounts			(134,112	)			(705,986	)
Less current portion of long term debt			(42,398,865	)			(42,372,933	)
Total long-term debt		$	12,289			$	270,291

Short Term Line of Credit

On April 9, 2009 the Company entered into a Term Note Credit Agreement with Next View Partners, LLC (“Next View”), as administrative agent and collateral agent for certain lenders. This credit facility provided for borrowings of up to $10.0 million, and was permitted indebtedness under the indenture for the Company’s 10.5% Senior Secured Notes due 2010. The agreement allowed the Company the right to borrow up to an aggregate of $5.0 million on or before June 30, 2009 and an aggregate of $10.0 million after June 30, 2009. All amounts under the revolving loans were scheduled to mature on December 15, 2009, unless the Company obtained the consent of holders of two-thirds of the principal amount of its 10.5% Senior Secured Notes due 2010 to extend the maturity date until April 9, 2010.

On December 10, 2009, Centaurus Energy Master Fund, LP (“Centaurus”) assumed and modified the Term Note Credit Agreement with Next View. Centaurus held more than two-thirds of the principal amount of the Company’s 10.5% Notes due 2010. The loan modification agreement reduced the face amount of the note issued from $10.0 million to $5.0 million, extended the maturity date of the loan from December 15, 2009 to December 15, 2010 and amended the minimum coal production and shipment amounts.

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

In April 2010, Ranger Investments LLC, a Ranger affiliate, purchased from Centarus Energy Master Fund, LP $30.3 million of the Company’s $42.0 million 10.5% Notes due 2010 and also purchased the Company’s $5.0 million short-term revolving credit facility. The Company used a portion of the proceeds from the Ranger Transaction to repay the $4.5 million outstanding balance on the short term revolving credit facility and the revolving credit agreement was terminated.

10. Asset Retirement Obligations

Asset retirement obligation activity for continuing operations for the nine months ended September 30, 2010 follows:

 

Obligation at December 31, 2009		$	3,888,740
Accretion expense			327,080
Obligation included in asset sale			(476,059	)
Obligations settled			(61,305	)
Obligation at September 30, 2010			3,678,456
Current portion			(98,528	)
Long-term liability at September 30, 2010		$	3,579,928

11. Stockholders’ Equity

On June 21, 2010, the Company’s shareholders approved amendments to the Company’s Articles of Incorporation giving the Company’s Board of Directors approval to execute a reverse split of the Company’s common shares at a ratio within a range of 1- for- 1.5 to 1- for- 4, and increase from 80,000,000 to 120,000,000 the number of authorized common shares. The Company’s Board of Directors approved a reverse 1- for- 4 stock split effective June 22, 2010. Share and per share amounts shown in the condensed consolidated financial statements and related notes reflect the split as though it occurred on January 1, 2009.

12. Stock – Based Compensation Plan

On January 8, 2010, the Company’s Board of Directors authorized the amendment of certain stock option agreements previously issued to the Company’s employees, officers and members of the Board of Directors pursuant to the Company’s Amended and Restated 2004 National Coal Corp. Option Plan. All of the Company’s outstanding options, as well as the Company’s form of Stock Option Agreement for future grants, were amended to provide for acceleration of vesting upon a change in control of the Company. Additionally, all options granted prior to January 1, 2009 were amended to reduce the exercise price to $4.56.

Prior to the repricing, many of the options had exercise prices well above the recent market prices of the Company’s common stock as quoted on the NASDAQ Global Market. The Board of Directors amended these options for, and to realign the value of the issued options with, their intended purpose, which is to retain and motivate the Company’s employees, officers and directors.

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

The Company recorded $55,423 and $421,661 in stock-based compensation during the three months ended September 30, 2010 and 2009 including a reduction of $122,348 in restricted stock expense as a result of an executive departure during September 2010. During the nine months ended September 30, 2010, the Company recognized $785,123 in stock-based compensation expense from continuing operations, including $335,708 in stock-based compensation expense as a result of the 2010 option repricing and $74,278 in restricted stock expense. The Company recorded $1,126,961 in stock-based compensation expense including $104,583 in restricted stock expense during the nine months ended September 30, 2009.

The fair value of each option was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

		Three Months  Ended September 30,								Nine Months  Ended September 30,
		2010				2009				2010				2009
Expected term (years)			*				6.00				6.00				6.00
Risk-free interest rates			*				2.69	%			3.18	%			3.37	%
Expected dividend yield			*				0.0	%			0.0	%			0.0	%
Expected volatility			*				94.74	%			95.78	%			65.57	%

 

*	No grants issued during the three months ended September 30, 2010

The risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant, volatility is based on the average long-term implied volatilities of peer companies until December 31, 2007, as the Company’s trading history was limited. Effective January 1, 2008, the Company began using its own historical volatility. The expected term is determined using the simplified method as accepted under Securities and Exchange Commission Staff Accounting Bulletin No. 107 assuming a ten-year original contract term and graded vesting over four years. The weighted-average grant-date fair value of options issued during the three months ended September 30, 2009 was $3.00. There were no options exercised during the three or nine months ended September 30, 2010 or 2009.

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

Stock option activity for the nine months ended September 30, 2010 follows:

 

		Options Outstanding				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value
Outstanding at December 31, 2009			513,731			$	19.88				7.40			$	750
Granted			118,688				4.09
Exercised			—				—
Forfeited			(44,130	)			11.14
Expirations			(40,188	)			19.39
Outstanding at March 31, 2010			548,101				4.97				7.90				—
Granted			22,500				0.66
Exercised			—
Forfeited			(23,344	)			14.51
Expirations			(7,000	)			4.16
Outstanding at June 30, 2010			540,257				4.39				7.73				—
Granted			—
Exercised			—
Forfeited			(36,189	)			4.22
Expirations			(3,000	)			4.16
Outstanding at September 30, 2010			501,068			$	4.40				7.37			$	6,975
Vested or expected to vest at September 30, 2010			466,250			$	3.61
Exercisable			354,174			$	4.73

As of September 30, 2010, there was $182,295 of total unrecognized compensation cost related to non-vested stock options granted under the Plan. That cost is expected to be recognized over a weighted average period of 3.37 years. The weighted average remaining contractual term of exercisable options at September 30, 2010 was 2.73 years. The total fair value of shares vested during the nine months ended September 30, 2010 and 2009, was $801,272, and $1,418,724, respectively. As discussed in Note 1, if approved and upon close, the proposed merger with Ranger Energy will trigger the immediate vesting and recognition of all remaining unrecognized compensation cost.

13. Earnings (Loss) Per Share

Basic earnings or loss per share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the year. Diluted earnings or loss per share is computed similarly to basic earnings or loss per share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. Diluted earnings or loss per share includes dilutive common stock equivalents, using the treasury stock method, and assumes that the potentially dilutive instruments were converted into common stock at the beginning of the year or upon issuance. Stock options with exercise prices greater than the average fair market price for a period, which are defined as anti-dilutive, are not included in the diluted earnings or loss per share calculations because of their anti-dilutive effect. In periods of losses, diluted loss per share is computed on the same basis as basic loss per share as the inclusion of any other potential shares outstanding would be anti-dilutive.

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

At September 30, 2010 and 2009, 1,171,185 and 1,332,309, respectively, potentially dilutive shares of the Company from warrants, stock options and restricted stock were not included in the computation of diluted loss per share because to do so would be anti-dilutive.

The computations for basic and diluted earnings or loss per share from continuing operations are as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Numerator:
Net income (loss) from continuing operations		$	(3,696,728	)		$	(4,536,691	)		$	(9,211,630	)		$	(13,414,779	)
Denominator:
Weighted average shares - basic and diluted			8,522,417				8,502,360				8,542,714				8,496,936
Net earnings (loss) per share from continuing operations - basic and diluted		$	(0.43	)		$	(0.53	)		$	(1.08	)		$	(1.58	)

For all periods presented, earnings (loss) per share from continuing operations has been retroactively adjusted as a result of the Company’s 1- for- 4 reverse stock split effective June 22, 2010.

14. Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments at September 30, 2010 and December 31, 2009:

Cash and accounts receivable: The carrying amount approximates fair value because of the short maturity of these instruments.

Debt: The fair value of the Company’s debt is estimated based on the quoted market prices for similar issues or on the estimated current rate of incremental borrowing available to the Company for similar liabilities.

The estimated fair values of the Company’s financial instruments are as follows:

 

		September 30, 2010								December 31, 2009
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial Assets:
Cash and cash equivalents		$	3,136,237			$	3,136,237			$	1,185,725			$	1,185,725
Accounts receivable			469,035				469,035				366,680				366,680
Restricted cash			3,707,059				3,707,059				6,211,637				6,211,637
Financial Liabilities:
Debt			42,411,154				28,131,154				45,643,224				38,083,224

 

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National Coal Corp.

Notes to Condensed Consolidated Financial Statements — continued

(Unaudited)

 

 

15. Commitments and Contingencies

The Company is made a party to legal actions, claims, arbitration and administrative proceedings from time to time in the ordinary course of business. Management is not aware, except as noted below, of any pending or threatened proceedings that might have a material impact on its cash flows, results of operations or financial condition.

The Company is a defendant in a lawsuit in the Circuit Court of Anderson County, Tennessee, alleging that National Coal Corporation was negligent in the case of a vehicular accident which resulted in the death of an independent contract truck driver. The plaintiffs are seeking $7.0 million in compensable damages and $10.0 million in punitive damages. The Company believes it has meritorious defenses to all of the claims asserted in this action and will continue to vigorously defend its position; however, the Company cannot predict the outcome of this proceeding at this time, and cannot predict whether the outcome will have a material adverse effect on its financial condition.

On November 2, 2010, a putative class action complaint was filed by Harold Sofie against the Company and each of its directors in the Circuit Court of the Thirteenth Judicial Circuit in and for Hillsborough County, Florida, purportedly on behalf of the public stockholders of the Company. The complaint alleges, among other things, that our directors breached their fiduciary duties to our public stockholders by, among other things, failing to disclose material information in the preliminary proxy statement the Company filed on October 13, 2010 relating to the solicitation of proxies for the special meeting of stockholders to be held for the purpose of considering the approval and adoption of the merger and the merger agreement. Among other things, the complaint seeks class action status, a court order enjoining the completion of the transaction, a court order directing the Company disclose additional information regarding the merger and merger agreement, and the payment of attorneys’ fees and expenses. The Company believes it has meritorious defenses to all of the claims asserted in this action and will continue to vigorously defend its position; however, the Company cannot predict the outcome of this proceeding at this time, and cannot predict whether the outcome will have a material adverse effect on its financial condition.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements or Information

The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2009 and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our condensed consolidated financial statements and the notes to the condensed consolidated financial statements included elsewhere in this Form 10-Q.

This report, including the section entitled, “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” contains “forward-looking statements” that include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new services; our expectations concerning litigation, regulatory developments or other matters; statements concerning projections, predictions, expectations, estimates or forecasts for our business, financial and operating results and future economic performance; statements of management’s goals and objectives; and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes” and “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, that performance or those results will be achieved. Forward-looking statements are based on information available at the time they are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause these differences include, but are not limited to:

 

•

continued weakness in US and worldwide economic conditions;

 

•

demand for coal, electricity and competing energy sources;

 

•

changes in environmental standards related to coal combustion causing coal users to switch to other fuels;

 

•

difficulties in implementing our business strategies;

 

•

reliance on customers honoring existing contracts and entering into new contracts;

 

•

dependence on one customer for a substantial portion of our sales;

 

•

unexpected disruption of rail or truck systems that transport our coal;

 

•

our ability to attract and retain skilled labor to meet our needs;

 

•

our ability to purchase coal from various third party sources;

 

•

inherent risks in surface and underground coal mining being subject to unexpected disruptions in our ability to produce coal including geological conditions, equipment failure, accidents and weather;

 

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•

the effects of governmental regulation including obtaining permits and the increasingly stringent federal and state proposals to regulate greenhouse gas emissions and to comply with various environmental standards for us and our customers;

 

•

increases in the price of certain products and commodities used in our mining operations that could impact our production and transportation costs;

 

•

the costs of reclamation associated with re-mining previously mined properties;

 

•

our assumptions regarding economically recoverable coal reserve estimates;

 

•

our ability to continue to provide cash collateral for reclamation surety bonds;

 

•

industry competition and various factors that cause fluctuations in the demand for coal and the price of coal;

 

•

our ability to continue to be able to provide capital necessary to finance our growth strategies amidst tightened credit standards and markets;

 

•

our ability to continue as a going concern;

 

•

our ability to refinance our $42.0 million 10.5% Notes due December 2010;

 

•

our ability to raise funds in debt or equity markets at terms acceptable to us, or if at all;

 

•

our ability to comply with restrictions imposed by our existing credit facilities;

 

•

our ability to obtain waivers from lenders if we do not comply with various financial covenants required under existing credit facilities;

 

•

our ability to complete the proposed merger transaction with Ranger Energy; and,

 

•

other factors discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”

Forward-looking statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

Corporate Overview

We mine, process and sell high quality bituminous steam coal from mines located in East Tennessee. From October 2007 until August 2009, we had mining operations in North Alabama. Our subsidiary, National Coal of Alabama, Inc., which operated our Alabama mining operations, defaulted on its senior secured debt, resulting in the lender’s foreclosure on our subsidiary’s outstanding capital stock. As a result, National Coal of Alabama, Inc. ceased to be our subsidiary in August 2009. Continuing operations consist of our Tennessee operations. Discontinued operations consist of the operating results of our Alabama operations from October 2007 through August 2009.

On September 27, 2010, we entered into the agreement and plan of merger with Ranger Energy and Merger Sub, pursuant to which we will merge with and into Merger Sub and each outstanding share of our common stock will be converted into the right to receive $1.00 in cash. The merger must be approved by holders of a majority of our outstanding shares of common stock at a meeting presently scheduled for

 

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December 2, 2010, and the transactions contemplated by the merger agreement are subject to other customary closing conditions. If the merger is consummated, National Coal Corp. will cease to exist and Merger Sub will remain a wholly-owned subsidiary of Ranger Energy. The merger is expected to close prior to December 15, 2010, the maturity date of our 10.5% Notes due 2010. If the merger does not close prior to such date, we will default on the 10.5% Notes due 2010 and most likely need to seek protection from creditors under federal bankruptcy laws.

We have filed a definitive proxy statement and other documents concerning the proposed merger with the Securities and Exchange Commission. Shareholders are urged to read the definitive proxy statement and any other relevant documents filed with the SEC because they contain important information about the proposed transaction.

At September 30, 2010, our continuing operations owned the coal mineral rights to approximately 65,000 acres of land and leased the rights to approximately 14,000 additional acres. As of September 30, 2010, our mining complexes included one active underground mine, one active surface mine, one preparation plant and one unit train loading facility served by the Norfolk Southern railroad. In addition, we began construction in July 2010 on a new underground mine near our current active operations. As of September 30, 2010, we controlled approximately 38.8 million estimated recoverable tons of coal reserves as defined by the SEC Industry Guide 7 as that part of a mineral deposit which could be economically and legally extracted at the time of the reserve determination.

At September 30, 2010, we had cash and cash equivalents of approximately $3.1 million and negative working capital of approximately $42.9 million. Included in working capital is $41.9 million of secured indebtedness, net of discounts, that matures on December 15, 2010. Cash flows (used in) provided by continuing operations were approximately $(6.0) million and $6.6 million for the nine months ended September 30, 2010 and 2009, respectively.

During the remainder of 2010, we expect to incur approximately $0.6 million in new capital expenditures for the construction of a new underground mine near our current active operations and $0.2 million to maintain existing assets. The proceeds received from the sale of assets during June 2010 will be the primary source of funding for the new capital expenditures. In prior years, we have experienced the unanticipated loss of the use of key equipment, which resulted in lost production and lost revenues. We may experience similar mechanical failures in the future, which could have a material adverse effect on our operating cash flows.

During the nine months ended September 30, 2010, our continuing operations generated total revenues of $36.5 million and sold approximately 0.4 million tons of coal. Revenues are derived primarily from the sale of coal to electric utility companies in the Southeastern United States pursuant to long-term contracts or open purchase order arrangements with long-time customers. Georgia Power Company represented approximately 97% of our continuing operations’ coal revenues for the nine months ended September 30, 2010.

We typically sell our coal for a specified per ton amount and at a negotiated price pursuant to both short-term contracts and contracts of twelve months or greater. The weighted average selling price per ton for continuing operations is $87.94 and $85.32 on 0.1 million and 0.5 million tons contracted for the remainder of 2010 and fiscal year 2011, respectively. Price adjustment, “price reopener” and other similar provisions in long-term supply agreements may reduce the protection from short-term coal price volatility traditionally provided by such contracts. Any adjustment or renegotiation leading to a significantly lower contract price would result in decreased revenues and lower gross margins, which could have a material adverse effect on our operating cash flows. Additionally, our customers may have the ability to delay the timing of their purchases, which could negatively impact operating cash flows. Finally, coal supply agreements also typically contain force majeure provisions allowing temporary suspension of performance by us or our customers during the duration of specified events beyond the control of the affected party.

 

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We have experienced net operating losses and net negative cash flows since our inception in 2003. Our 10.5% senior notes mature on December 15, 2010. In January 2010, our largest customer exercised its rights of force majeure under our coal supply contract due to freezing weather in the Southeast United States, which resulted in their suspension of our shipment of approximately 40,000 tons of coal. While our customer is obligated under our contract to purchase this coal within twelve months after the end of the event, the suspension of these shipments resulted in an immediate reduction in cash receipts of approximately $3.0 million during January and February 2010.

On April 20, 2010, we completed the sale to Ranger Energy Investments, LLC of our preparation plant and rail loadout facility located in Devonia, Tennessee, an active underground mine, two inactive mines, and related property, plant and equipment used in and located at our New River Tract operations, coal inventories located on the properties, associated permits and a coal supply agreement for an aggregate sales price of $11.8 million (the “Ranger Transaction”). Ranger Energy also assumed reclamation liabilities related to the acquired properties and paid us $1.9 million in cash which was previously pledged to secure reclamation bonds and other liabilities associated with the permits sold. The $1.9 million of pledged cash will be repaid directly to Ranger Energy by the surety company that issued the Company’s reclamation bonds when the regulatory process of transferring the related mining permits to Ranger Energy is completed. Additionally, we entered into a lease agreement with Ranger Energy to lease mineral rights on approximately 22,000 acres of the New River Tract, with royalties ranging from 6% to 8% of applicable revenues, and Ranger Energy agreed to pay us an overriding royalty for each ton of coal sold by Ranger Energy pursuant to the coal supply agreement it acquired in the asset sale. Of the purchase price, $6.6 million was paid by Ranger Energy assuming $6.6 million of accounts payable we owed to an affiliate of Ranger Energy. Prior to the closing of the asset sale, Ranger Investments, LLC, a Ranger affiliate, purchased from Centarus Energy Master Fund, LP $30.3 million of our $42.0 million in principal amount of 10.5% Notes due 2010 and also purchased our $5.0 million short-term revolving credit facility, of which $4.5 million had been drawn. We were required to pay off the revolving credit facility from the Ranger Transaction sale proceeds and the revolving credit agreement was terminated. We received $1.4 million in net cash proceeds from the asset sale and related transactions.

 

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Results of Operations

The following table presents consolidated statement of operations data for each of the three and nine months ended September 30 as a percentage of revenues.

 

(in percentages)		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Revenues			100.0				100.0				100.0				100.0
Operating expenses:
Cost of sales			92.7				90.5				91.6				90.1
Cost of services			0.6				2.7				0.2				3.6
Depreciation, depletion, amortization and accretion			13.2				10.8				11.9				11.6
Gain on asset disposals, net			(0.8	)			—				(6.9	)			—
General and administrative			17.0				8.3				15.0				8.1
Total operating expenses			122.7				112.3				111.8				113.4
Loss from continuing operations			(22.7	)			(12.3	)			(11.8	)			(13.4	)
Other income (expense):
Interest expense			(15.5	)			(8.6	)			(13.1	)			(7.8	)
Interest income			—				0.2				—				0.3
Other			(0.1)				0.2				(0.4)				0.0
Loss from continuing operations before income taxes			(38.3	)			(20.5	)			(25.3	)			(20.9	)
Income tax benefit			—				—				—				—
Loss from continuing operations			(38.3)				(20.5)				(25.3)				(20.9)
Income (loss) from discontinued operations, net of taxes			—				17.5				—				(2.3	)
Net loss			(38.3	)			(3.0	)			(25.3	)			(23.2	)

Comparison of Three Months Ended September 30, 2010 and Three Months Ended September 30, 2009

Production

During the three months ended September 30, 2010 and 2009, our Tennessee mines produced 79,834 and 201,121 tons of coal, respectively, as follows:

 

		Three Months Ended September 30,
		2010								2009
		Tons				%				Tons				%
Production:
Surface mines			41,467				40.0				100,496				34.9
Highwall mines			—				—				20,280				7.0
Underground mines			38,367				37.1				80,345				27.9
Total tons produced			79,834				77.1				201,121				69.8
Purchased coal			23,626				22.9				87,137				30.2
Total tons available			103,460				100.0				288,258				100.0

 

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The 121,287 ton decrease in tons produced in 2010 compared to 2009 was the result of the idling of one of our higher cost underground mines and the closing of an underground mine in order to take advantage of purchased coal prices that were lower than our mining costs at these two mines, as well as the sale of one active underground mine in April 2010 to Ranger Energy. The 63,511 decrease in tons of purchased coal in 2010 compared to 2009 was primarily due to the assignment of a coal supply agreement to Ranger Energy on April 20, 2010 as part of the Ranger Transaction.

Revenue

During the three months ended September 30, 2010, we generated substantially all of our coal sales revenue from one electric utility customer.

Tons sold and the associated revenue for the three month periods follows:

 

		Three Months Ended September 30,								Increase/(decrease)
		2010				2009				$				%
Coal sales		$	8,820,390			$	21,483,618			$	(12,663,228	)			(58.9	)
Tons sold			102,175				286,447				(184,272	)			(64.3	)
Average price per ton sold		$	86.33			$	75.00			$	11.33				15.1
Other revenues		$	845,811			$	637,181			$	208,630				32.7

The 58.9% decrease in revenue from coal sales for the three months ended September 30, 2010 as compared to the same period in 2009 was primarily due to the assignment of a coal supply agreement to Ranger Energy on April 20, 2010 as part of the Ranger Transaction.

The increase in other revenue of $0.2 million was the result of royalties received, offset by a decrease in contract mining revenue.

Cost of Sales

 

		Three Months Ended September 30,								Increase/(decrease)
		2010				2009				$				%
Cost of sales		$	8,960,772			$	20,028,882			$	(11,068,110	)			(55.3	)
Tons sold			102,175				286,447				(184,272	)			(64.3	)
Average cost per ton sold		$	87.70			$	69.92			$	17.78				25.4
Cost of services		$	57,682			$	608,274			$	(550,592	)			(90.5	)

Total cost of sales decreased 55.3% on a 58.9% decrease in coal sales revenue during the three months ended September 30, 2010 as compared to the same three month period in 2009 due primarily to the sale on April 20, 2010 of a portion of our properties and operations in the Ranger Transaction. Cost per ton sold during 2010 compared to 2009 from our continuing operations increased by $17.78 due primarily to increases in labor of $6.03 per ton sold, maintenance and supplies of $3.62 per ton sold, workers compensation of $5.32 per ton sold, royalties of $2.15 per ton sold and hauling and fuel costs of $0.84 per ton sold.

 

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Cost of services decreased $0.6 million due to the termination of a contract mining services agreement during November 2009 between Xinergy Corp. and National Coal Corporation to mine coal from a highwall mine previously sold to Xinergy Corp. as part of the Straight Creek sale on March 31, 2008.

Depreciation, Depletion, Amortization and Accretion

 

		Three Months Ended September 30,								Increase/(decrease)
		2010				2009				$				%
Depreciation, depletion, amortization and accretion		$	1,272,021			$	2,392,606			$	(1,120,585	)			(46.8	)
Tons sold			102,175				286,447				(184,272	)			(64.3	)
Average cost per ton sold		$	12.45			$	8.35			$	4.10				49.0

The 46.8% decrease in depreciation, depletion, amortization, and accretion expense for the three months ended September 30, 2010 as compared to the same three month period in 2009 was primarily the result of:

 

(i)

A $0.5 million decrease in depreciation, amortization and accretion expense as a result of the disposition on April 20, 2010 of a portion of our properties and related operations in the Ranger Transaction;

 

(ii)

A $0.3 million decrease in depreciation expense attributable to a Superior Highwall Mining System becoming fully depreciated in March 2010 and was subsequently sold in June 2010;

 

(iii)

A $0.2 million decrease in expense attributable to an idled highwall mine during 2009; and

 

(iv)

A $0.1 million decrease in expense as a result of certain equipment becoming fully depreciated in 2009.

General and Administrative Expenses

 

		Three Months Ended September 30,								Increase/(decrease)
		2010				2009				$				%
General and administrative expense		$	1,647,041			$	1,821,731			$	(174,690	)			(9.6	)
Tons sold			102,175				286,447				(184,272	)			(64.3	)
Average cost per ton sold		$	16.12			$	6.36			$	9.76				153.5

The 9.6% decrease in general and administrative expenses for the three months ended September 30, 2010 as compared to the same period in the previous year is primarily attributable to the increase in professional and consulting fees, primarily related to the Ranger Transaction on April 20, 2010, of $0.4 million offset by a decrease in payroll expense of $0.2 million and stock compensation expense of $0.4 million.

 

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Other (Income) Expense

 

		Three Months Ended September 30,								Increase/(decrease)
		2010				2009				$				%
Interest expense		$	1,498,769			$	1,910,496			$	(411,727	)			(21.6	)
Interest income			(1,376	)			(65,175	)			63,799				(97.9	)
Other			6,003				(39,324	)			45,327				(115.3	)
Total other (income) expense		$	1,503,396			$	1,805,997			$	(302,601	)			(16.8	)

The 21.6% decrease in interest expense for the three months ended September 30, 2010 as compared to the same period in 2009, is primarily related to the repayment of a capital lease obligation and our short term line of credit with the proceeds from the Ranger Transaction on April 20, 2010.

Interest income decreased by 97.9% during the three months ended September 30, 2010 compared to the same period in 2009 due to lower average restricted cash balances in 2010 compared to 2009.

Income from Discontinued Operations, Net of Taxes

The income from discontinued operations of $3.9 million during the three months ended September 30, 2009 represents the operating results of our Alabama operations. Our Alabama operations were disposed of in August 2009.

During the three months ended September 30, 2009 our discontinued operations sold 46,741 tons at an average sales price of $79.41 for total sales revenue of $3.7 million.

 

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Comparison of Nine Months Ended September 30, 2010 and Nine Months Ended September 30, 2009

Production

During the nine months ended September 30, 2010 and 2009, our Tennessee mines produced 308,133 and 631,756 tons of coal, respectively, as follows:

 

		Nine Months Ended September 30,
		2010								2009
		Tons				%				Tons				%
Production:
Surface mines			136,411				29.9				283,799				32.7
Highwall mines			—				—				80,891				9.3
Underground mines			171,722				37.6				267,066				30.7
Total tons produced			308,133				67.5				631,756				72.7
Purchased coal			148,648				32.5				237,828				27.3
Total tons available			456,781				100.0				869,584				100.0

The 323,623 ton decrease in tons produced in 2010 compared to 2009 was the result of the idling of one of our higher cost underground mines and the closing of an underground mine in order to take advantage of purchased coal prices that were lower than our mining costs at these two mines, as well as the sale of one active underground mine in April 2010 to Ranger Energy. The 89,180 decrease in tons of purchased coal in 2010 compared to 2009 was primarily due to the assignment of a coal supply agreement to Ranger Energy on April 20, 2010 as part of the Ranger Transaction.

Revenue

During the nine months ended September 30, 2010, we generated substantially all of our coal sales revenue from one electric utility customer.

Tons sold and the associated revenue for the nine month periods follows:

 

		Nine Months Ended September 30,								Increase/(decrease)
		2010				2009				$				%
Coal sales		$	35,077,102			$	62,325,476			$	(27,248,374	)			(43.7	)
Tons sold			420,876				855,036				(434,160	)			(50.8	)
Average price per ton sold		$	83.34			$	72.89			$	10.45				14.3
Other revenues		$	1,388,699			$	2,400,759			$	(1,012,060	)			(42.2	)

The 43.7% decrease in revenue from coal sales for the nine months ended September 30, 2010 as compared to the same period in 2009 was primarily due to reduced sales to our largest customer and the sale of a coal supply agreement to Ranger Energy on April 20, 2010 as part of the Ranger Transaction.

In January 2010, our largest customer exercised its rights of force majeure under our coal supply contract due to freezing weather in the Southeast United States, which resulted in its suspension of our shipment of approximately 40,000 tons of coal. While the customer is obligated under our contract to purchase this coal within twelve months after the end of the event, the suspension of these shipments resulted in a reduction in coal sales of approximately $3.0 million during January and February 2010.

 

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The decrease in other revenues of $1.0 million is due to a reduction in revenue from a contract mining services agreement between Xinergy Corp. and National Coal Corporation to mine coal from a highwall mine previously sold to Xinergy Corp. as part of an asset sale on March 31, 2008. The contract mining agreement with Xinergy Corp. was terminated during November 2009. The decrease in other revenue was partially offset by royalty payments received from Ranger Energy as part of the Ranger Transaction on April 20, 2010.

Cost of Sales

 

		Nine Months Ended September 30,								Increase/(decrease)
		2010				2009				$				%
Cost of sales		$	33,388,620			$	58,295,500			$	(24,906,880	)			(42.7	)
Tons sold			420,876				855,036				(434,160	)			(50.8	)
Average cost per ton sold		$	79.33			$	68.18			$	11.15				16.4
Cost of services		$	85,241			$	2,316,948			$	(2,231,707	)			(96.3	)

Total cost of sales decreased 42.7% on a 43.7% decrease in coal sales revenue during the nine months ended September 30, 2010 as compared to the same nine month period in 2009.

During 2009, we idled one of our higher cost underground mines and closed an underground mine in order to take advantage of purchased coal prices that were lower than our mining costs at these two mines. As a result of the mine closures and the 50.8% decrease in tons sold, attributable to the Ranger Transaction in April 2010, our cost per ton sold during 2010 compared to 2009 from our continuing operations increased by $11.15 due primarily to increases in labor of $3.80 per ton sold, maintenance and supplies of $2.38 per ton sold, royalties of $1.56 per ton sold, and workers compensation of $2.65 per ton sold.

Cost of services decreased $2.2 million due to the termination of a contract mining services agreement during November 2009 between Xinergy Corp. and National Coal Corporation to mine coal from a highwall mine previously sold to Xinergy Corp. as part of the Straight Creek sale on March 31, 2008.

Depreciation, Depletion, Amortization and Accretion

 

		Nine Months Ended September 30,								Increase/(decrease)
		2010				2009				$				%
Depreciation, depletion, amortization and accretion		$	4,340,224			$	7,528,951			$	(3,188,727	)			(42.4	)
Tons sold			420,876				855,036				(434,160	)			(50.8	)
Average cost per ton sold		$	10.31			$	8.81			$	1.50				17.1

The 42.4% decrease in depreciation, depletion, amortization, and accretion expense for the nine months ended September 30, 2010 as compared to the same period in 2009 was primarily the result of:

 

(i)

A $0.9 million decrease in depreciation, amortization and accretion expense as a result of the disposition on April 20, 2010 of a portion of our properties and operations in the Ranger Transaction;

 

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(ii)

A $0.6 million decrease in depreciation expense attributable to a Superior Highwall Mining System becoming fully depreciated in March 2010;

 

(iii)

A $0.6 million decrease in expense attributable to an idled highwall mine during 2009;

 

(iv)

A $0.8 million decrease in expense as a result of certain equipment becoming fully depreciated in 2009; and

 

(v)

A $0.3 million decrease in expense attributable to increased capitalization of expense in inventory as a result of the increase in inventory levels in 2010 compared to 2009.

Gain on asset disposals, net

The (gain) loss on asset disposal increased $2.5 million during the nine months ended September 30, 2010 compared to the same period in 2009 as a result of the following:

 

(i)

On April 20, 2010, we sold certain property, plant, equipment and mine development from our New River tract operations. The property, plant, equipment and mine development sold resulted in a loss of approximately $1.3 million.

 

(ii)

On May 19, 2010, we sold the short line railroad owned by our wholly-owned subsidiary NC Railroad, Inc for $3.0 million less $0.1 million in accounts payable. The property and equipment sold had a net book value of $3.2 million and resulted in a loss of approximately $0.2 million.

 

(iii)

On June 30, 2010, our wholly-owned subsidiary, National Coal Corporation sold a Superior Highwall Mining System for $4.1 million. The assets sold had an immaterial net book value resulting in a gain on the sale of $4.1 million.

General and Administrative Expenses

 

		Nine Months Ended September 30,								Increase/(decrease)
		2010				2009				$				%
General and administrative expense		$	5,481,813			$	5,247,932			$	233,881				4.5
Tons sold			420,876				855,036				(434,160	)			(50.8	)
Average cost per ton sold		$	13.02			$	6.14			$	6.88				112.1

The 4.5% increase in general and administrative expenses for the nine months ended September 30, 2010 as compared to the same period in the previous year is primarily attributable to an increase in professional and consulting fees of $1 million primarily related to the Ranger Transaction on April 20, 2010, offset by a decrease in payroll and stock compensation expense of $0.8 million.

 

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Other (Income) Expense

 

		Nine Months Ended September 30,								Increase/(decrease)
		2010				2009				$				%
Interest expense		$	4,762,493			$	5,037,908			$	(275,415	)			(5.5	)
Interest income			(6,132	)			(222,281	)			216,149				(97.2	)
Other			158,904				(63,944	)			222,848				(348.5	)
Total other (income) expense		$	4,915,265			$	4,751,683			$	163,582				3.4

Interest income decreased by 97.2% during the nine months ended September 30, 2010 compared to the same period in 2009 due to lower average restricted cash balances in 2010 compared to 2009.

Other increased by $0.2 million primarily due to the loss on extinguishment of debt of $0.2 million resulting from the repayment of our revolving line of credit with a portion of the proceeds from the Ranger Transaction.

Loss from Discontinued Operations, Net of Taxes

The loss from discontinued operations of $1.5 million during the nine months ended September 30, 2009 represents the operating results of our Alabama operations. Our Alabama operations were disposed of in August 2009.

During the nine months ended September 30, 2009 our discontinued operations sold 404,245 tons at an average sales price of $77.45 for total sales revenue of $31.3 million.

Liquidity and Capital Resources

At September 30, 2010, we had cash and cash equivalents of approximately $3.1 million and negative working capital of approximately $42.9 million. Cash flows (used in) provided by continuing operations were approximately $(6.0) million and $6.6 million for the nine months ended September 30, 2010 and 2009, respectively. At September 30, 2010, we had a stockholders’ deficit of $20.7 million and incurred net losses from continuing operations of $9.2 million for the period then ended. Management expects that we will continue to incur net losses for the foreseeable future.

During the first quarter of 2010, our liquidity was adversely affected further when our largest customer exercised its rights of force majeure under our coal supply contract due to freezing weather in the Southeastern United States, which resulted in their suspension of our shipment of approximately 40,000 tons of coal. While the customer is obligated under our contract to purchase this coal within twelve months after the end of the event, the suspension of these shipments resulted in an immediate reduction in cash receipts of approximately $3.0 million during January and February 2010.

In 2009, we concluded that cash generated from operations would not be sufficient to pay interest or principal on our 10.5% Notes due 2010, and we began exploring strategic alternatives to improve our liquidity and reduce our debt obligations. We engaged the services of a financial advisory firm to evaluate possible strategic and financing transactions.

On September 27, 2010, we entered into the agreement and plan of merger with Ranger Energy and Merger Sub, pursuant to which we will merge with and into Merger Sub and each outstanding share of our common stock will be converted into the right to receive $1.00 in cash. The merger must be approved

 

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by holders of a majority of our outstanding shares of common stock at a meeting presently scheduled for December 2, 2010, and the transactions contemplated by the merger agreement are subject to other customary closing conditions. If the merger is consummated, National Coal Corp. will cease to exist and Merger Sub will remain a wholly-owned subsidiary of Ranger Energy. The merger is expected to close prior to December 15, 2010, the maturity date of the Company’s 10.5% Notes due 2010. If the merger does not close prior to such date, we will default on the 10.5% Notes due 2010 and most likely need to seek protection from creditors under federal bankruptcy laws.

On January 5, 2010, we received a deficiency notice from The NASDAQ Stock Market stating that we had not met the $1.00 minimum closing bid price requirement for thirty consecutive trading days as required under NASDAQ listing rules. We failed to regain compliance with the minimum bid price requirement, and on July 8, 2010 we received a notice from The NASDAQ Stock Market indicating that our common stock would be delisted. On July 13, 2010, we requested a hearing with the NASDAQ Listing Qualifications Panel (“Panel”) to review the delisting determination, which oral hearing took place August 5, 2010. On September 29, 2010, the Panel agreed to grant us a conditional listing (exemption) for an additional period of time not to exceed 180 days from the date of the delisting notification or until January 4, 2011, to allow us time to complete the merger with Ranger.

On June 16, 2010, we were notified by The NASDAQ Stock Market that we were not in compliance with an additional NASDAQ listing requirement because the market value of our publicly held shares of common stock was less than $15 million for 30 consecutive business days. We have 180 calendar days, or until December 13, 2010, to regain compliance with this listing rule. To regain compliance with the minimum value of publicly held shares rule, the market value of our publicly held shares, based on the closing bid price of our common stock, must equal at least $15 million for a minimum of ten consecutive business days. If we do not regain compliance by December 13, 2010, the NASDAQ staff will notify us that our common stock will be delisted. In that event and at that time, we may appeal Nasdaq’s delisting determination to a NASDAQ Hearings Panel.

On April 20, 2010, we completed the Ranger Transaction. Prior to the closing of the Ranger Transaction, Ranger Investments, LLC, a Ranger affiliate, purchased from Centaurus Energy Master Fund, LP $30.3 million of our 10.5% Notes due 2010 and our $5.0 million short-term revolving line of credit, of which $4.5 million had been drawn. We were in default under the $5.0 million short-term revolving line of credit on the date we published our annual financial statements, which was reported on with a “going concern” qualification from our independent certified public accountants. We used a portion of the proceeds from the Ranger Transaction on April 20, 2010 to pay the $4.5 million outstanding balance on the revolving line of credit and the line of credit was terminated.

The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates our realization of assets and satisfaction of liabilities in the normal course of business, and our auditors have included a going concern qualification in their report on our financial statements. We have $42.0 million in senior secured notes that are due on December 15, 2010. We expect that our operations during 2010 will require $0.5 million to $0.6 million of cash on a monthly basis. Additionally, we must raise additional equity and/or refinance our senior secured debt before it matures on December 15, 2010. These factors, among others, may indicate that we will be unable to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern.

During 2008, we successfully renegotiated several of our existing coal supply agreements resulting in an increased selling price per ton during 2009. The weighted average selling price per ton is $87.94 and $85.32 on 0.1 million and 0.5 million tons contracted for the remainder of 2010 and fiscal year 2011, respectively. We typically sell our coal for a specified per ton amount and at a negotiated price pursuant

 

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to both short-term contracts and contracts of twelve months or greater. Price adjustment, “price reopener” and other similar provisions in long-term supply agreements may reduce the protection from short-term coal price volatility traditionally provided by such contracts. Any adjustment or renegotiation leading to a significantly lower contract price would result in decreased revenues and lower gross margins, which could have a material adverse effect on our operating cash flows. Additionally, our customers may have the ability to delay the timing of their purchases, which could negatively impact operating cash flows. Finally, coal supply agreements also typically contain force majeure provisions allowing temporary suspension of performance by us or our customers during the duration of specified events beyond the control of the affected party.

We expect we will meet our contract commitments through a combination of produced tons and purchased coal. Our production can be negatively impacted by weather, labor shortages or equipment break-downs. In addition, geological and mining conditions may not be fully identified by available exploration data or may differ from experience in current operations. Further, coal for purchase may not be available, or available only at unfavorable prices. The occurrence of such events can adversely affect production, the cost of sales or both, and could have a materially adverse effect on our operating cash flows.

During the remainder of 2010, management expects to incur approximately $0.6 million in new capital expenditures for the construction of a new underground mine near our current active operations and $0.2 million to maintain existing assets. The proceeds received from the sale of assets during June 2010 will be the primary source of funding for the new capital expenditures. In prior years, we experienced the unanticipated loss of the use of key equipment, which resulted in lost production and lost revenues. We may experience similar mechanical failures in the future, which could have a material adverse effect on our operating cash flows.

The following table summarizes our long-term debt obligations, excluding capital leases from continuing operations:

 

		September 30, 2010				December 31, 2009
10.5% Senior Secured Notes, due 2010		$	42,000,000			$	42,000,000
Equipment loans and installment purchase obligations			545,266				1,284,210
Insurance premium financing			—				65,000
			42,545,266				43,349,210
Unamortized discounts			(134,112	)			(705,986	)
Less current portion of long term debt			(42,398,865	)			(42,372,933	)
Total long-term debt		$	12,289			$	270,291

 

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Cash Flows

We currently satisfy our working capital requirements primarily through cash flows generated from operations and sales of debt and equity securities. During the nine months ended September 30, 2010 additional working capital was generated from the sale of certain assets. For the nine months ended September 30, 2010, we had a net increase in cash of approximately $1.9 million. Cash flows from operating, financing and investing activities for the nine months ended September 30, 2010 and 2009 are summarized in the following table:

 

		September 30, 2010				September 30, 2009
Activity:
Operating activities		$	(5,950,481	)		$	6,560,776
Investing activities			13,334,241				(5,242,793	)
Financing activities			(5,433,248	)			(1,166,043	)
Net increase (decrease) in cash and cash equivalents		$	1,950,512			$	151,940

Operating Activities

The net cash used in operating activities of $6.0 million during the nine months ended September 30, 2010 compared with prior year cash provided by operations of $6.6 million, a $12.6 million reduction from 2009, was primarily attributable to the prior period including the operating results for National Coal of Alabama, Inc. A portion of the change in cash flows from continuing operating activities was the result of a decrease in accounts payable and accrued expenses of $8.0 million primarily due to the repayment of accounts payable as a result of the Ranger Transaction, offset by an increase in inventory of $1.5 million as compared to the same period in 2009.

Investing Activities

The change in net cash used in investing activities from $5.2 million for the nine months ended September 30, 2009 to net cash provided by investing activities of $13.3 million for the nine months ended September 30, 2010 was primarily due to the prior period including $2.2 million of cash used in investing activities from National Coal of Alabama, Inc., a decrease in capital expenditures in our continuing operations of $4.2 million during 2010, and proceeds of $14.0 million from the sale of assets during the second quarter of 2010.

Financing Activities

The change in net cash used in financing activities of $5.4 million during the nine months ended September 30, 2010 compared to the net cash used in financing activities of $1.2 million for the nine months ended September 30, 2009 was primarily due to the $1.5 million in proceeds received from borrowings on our revolving credit facility entered into on April 9, 2009 offset by deferred financing costs and the repayment of the revolving credit facility outstanding balance of $4.5 million with a portion of the proceeds from the Ranger Transaction on April 20, 2010.

Off-Balance Sheet Arrangements

At September 30, 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

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Critical Accounting Policies, Judgments and Estimates

Accounting measurements at interim dates inherently involve greater reliance on estimates than those made at year-end. The results for the three and nine months ended September 30, 2010 are not necessarily indicative of results to be expected for the full year. Please refer to the section entitled “Critical Accounting Policies, Judgments and Estimates” included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on Form 10-K for the year ended December 31, 2009 for a discussion of our critical accounting policies, judgments and estimates. There have been no material changes to the previously reported information concerning our Critical Accounting Policies, Judgments and Estimates.

Recent Accounting Pronouncements

During the nine months ended September 30, 2010, there were no accounting pronouncements that became effective that impacted our financial statements.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Intentionally omitted.

 

Item 4T.

Controls and Procedures

Controls and Procedures

Members of our management, including our President and Chief Executive Officer, Daniel A. Roling, and Acting Chief Financial Officer, Les H. Wagner, have evaluated the effectiveness of our disclosure controls and procedures, as defined by paragraph (e) of Exchange Act Rules 13a-15 or 15d-15, as of September 30, 2010, the end of the period covered by this report. Based upon that evaluation, Messrs. Roling and Wagner concluded that our disclosure controls and procedures were effective as of September 30, 2010.

Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting or in other factors identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings.

On November 2, 2010, a putative class action complaint was filed by Harold Sofie against the Company and each of its directors in the Circuit Court of the Thirteenth Judicial Circuit in and for Hillsborough County, Florida, purportedly on behalf of the public stockholders of the Company. The complaint alleges, among other things, that our directors breached their fiduciary duties to our public stockholders by, among other things, failing to disclose material information in the preliminary proxy statement we filed on October 13, 2010 relating to the solicitation of proxies for the special meeting of stockholders to be held for the purpose of considering the approval and adoption of the merger and the merger agreement. Among other things, the complaint seeks class action status, a court order enjoining the completion of the transaction, a court order directing the Company disclose additional information regarding the merger and merger agreement, and the payment of attorneys’ fees and expenses. We have not yet answered or otherwise responded to the complaint. We believe that this lawsuit is without merit and intend to defend against these claims.

 

Item 1A.

Risk Factors

This Quarterly Report on Form 10-Q contains forward-looking statements, which are subject to a variety of risks and uncertainties. Other actual results could differ materially from those anticipated in those forward-looking statements as a result of various factors, including those set forth in the risk factors relating to our business and common stock contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.

The following risk factor updates, and should be considered in addition to, the risk factors previously disclosed by us in Part 1, Item 1A of our Annual Report for the fiscal year ended December 31, 2009.

We are subject to litigation related to the pending merger with Ranger Energy.

We are defending a putative class action lawsuit initiated by Harold Sofie against the Company and each of our directors in the Circuit Court of the Thirteenth Judicial Circuit in and for Hillsborough County, Florida, purportedly on behalf of our public stockholders. The complaint alleges, among other things, that our directors breached their fiduciary duties to our public stockholders by, among other things, failing to disclose material information in the preliminary proxy statement we filed on October 13, 2010 relating to the solicitation of proxies for the special meeting of stockholders to be held for the purpose of considering the approval and adoption of the merger and the merger agreement. Among other things, the complaint seeks class action status, a court order enjoining the completion of the transaction, a court order directing us to disclose additional information regarding the merger and merger agreement, and the payment of attorneys’ fees and expenses. The absence of an injunction prohibiting the consummation of the proposed merger is a condition to the closing of the transaction.

While we believe that the claims made in this litigation are without merit and intend to defend such claims, there can be no assurance that we will prevail in our defense. Further, it is possible that additional claims beyond those that have already been filed will be brought by the current plaintiff or by others in an effort to enjoin the proposed acquisition or seek monetary relief from us. An unfavorable resolution of any such litigation surrounding the proposed acquisition could delay or prevent the consummation of the transaction. In addition, the cost to us of defending the litigation, even if resolved in our favor, could be substantial. Such litigation could also substantially divert the attention of our management and our resources in general. If the lawsuit prevents us from consummating the merger prior to December 15, 2010, we will default on our 10.5% Notes due 2010 and most likely need to seek protection from creditors under federal bankruptcy laws.

 

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If we are unable to consummate the pending merger with Ranger Energy prior to December 15, 2010, we will default on our 10.5% Notes due 2010 and most likely need to seek protection from creditors under federal bankruptcy laws.

Our 10.5% Notes due 2010 mature on December 15, 2010. If we are unable to consummate the pending merger with Ranger Energy prior to such date, we will default on the 10.5% Notes due 2010 due to our failure to pay the principal amount of and accrued interest on such indebtedness, and we will most likely need to seek protection from creditors under federal bankruptcy laws.

The liquidity of our common stock will be adversely affected if our common stock is delisted from The Nasdaq Global Market.

Our common stock is presently traded on The Nasdaq Global Market. To maintain inclusion on The Nasdaq Global Market, we must continue to meet certain listing requirements.

We received a deficiency notice from The NASDAQ Stock Market on January 5, 2010, stating that we had not met the $1.00 minimum closing bid price requirement for thirty consecutive trading days as required under NASDAQ listing rules. We failed to regain compliance with the minimum bid price requirement, and on July 8, 2010 we received a notice from The NASDAQ Stock Market indicating that our common stock would be delisted. On July 13, 2010, we requested a hearing with the NASDAQ Listing Qualifications Panel (“Panel”) to review the delisting determination, which oral hearing took place August 5, 2010. On September 29, 2010, the Panel agreed to grant us a conditional listing (exemption) for an additional period of time not to exceed 180 days from the date of the delisting notification or until January 4, 2011, to allow us time to complete the merger with Ranger.

On June 16, 2010, we were notified by The NASDAQ Stock Market that we were not in compliance with an additional NASDAQ listing requirement because the market value of our publicly held shares of common stock was less than $15 million for 30 consecutive business days. We have 180 calendar days, or until December 13, 2010, to regain compliance with this listing rule. To regain compliance with the minimum value of publicly held shares rule, the market value of our publicly held shares, based on the closing bid price of our common stock, must equal at least $15 million for a minimum of ten consecutive business days. If we do not regain compliance by December 13, 2010, the NASDAQ staff will notify us that our common stock will be delisted. In that event and at that time, we may appeal Nasdaq’s delisting determination to a NASDAQ Hearings Panel.

The market price of our common stock has generally been highly volatile and we cannot guarantee that we will be able to regain compliance with the minimum closing bid price or minimum value of publicly held shares requirements within any compliance periods. If we are delisted from The NASDAQ Stock Market, the market value of our common stock could fall and holders of common stock would likely find it more difficult to dispose of the common stock.

 

Item 5.

Other Items

Dodd-Frank Act Disclosure of Mine Safety and Health Administration Safety Data

We are committed to providing a safe workplace for all of our employees. Our company has in place health and safety programs that include extensive employee training, accident prevention, workplace inspection, emergency response, accident investigation, regulatory compliance and program auditing. The objectives of our health and safety programs are to eliminate workplace incidents, comply with all mining-related regulations and provide support for both regulators and the industry to improve mine safety. We believe our Company has a well-developed process of training, mentoring, monitoring, reduction of risk through safety innovation, and recognition of safety excellence.

 

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The operation of our mines is subject to regulation by The Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “FMSH Act”). MSHA inspects our mines on a regular basis and issues various citations and orders when it believes a violation has occurred under the FMSH Act. We present information below regarding certain mining safety and health citations which MSHA has issued with respect to our coal mining operations. In evaluating this information, consideration should be given to factors such as: (i) the number of citations and orders will vary depending on the size of the coal mine, (ii) the number of citations issued will vary from inspector to inspector and mine to mine, and (iii) citations and orders can be contested and appealed, and in that process, are often reduced in severity and amount, and are sometimes dismissed.

As required by the reporting requirements regarding coal mine safety included in §1503(a)(1) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the table below presents the following information for the three months ended September 30, 2010, except for pending legal actions, which are as of September 30, 2010, for each coal mining facilities of which the Company is an operator:

 

(a)

The total number of FMSH Act section 104 significant and substantial citations (i.e. there exists a reasonable likelihood that the hazard contributed to will result in an injury or illness of a reasonably serious nature) received, which are for alleged violations of a mining safety standard or regulation where there exists a reasonable likelihood that the hazard could result in an injury or illness of a reasonably serious nature;

 

(b)

The total number of FMSH Act section 104(b) orders received, which are for an alleged failure to totally abate (i.e. orders issued when conditions cited pursuant to section 104(a) have not been totally abated within the period of time set by MSHA) the subject matter of a FMSH Act section 104(a) citation within the period specified in the citation;

 

(c)

The total number of FMSH Act section 104(d) citations and orders received, which are for an alleged unwarrantable failure (i.e. aggravated conduct constituting more than ordinary negligence) to comply with a mining safety standard or regulation;

 

(d)

The total number of flagrant violations (i.e. reckless or repeated failure to make reasonable efforts to eliminate a known violation of a mandatory health or safety standard that substantially and proximately caused, or reasonably could have been expected to cause, death or serious bodily injury) under §110(b)(2) of the FMSH Act received;

 

(e)

The total number of imminent danger orders (i.e. the existence of any condition or practice in a coal or other mine which could reasonably be expected to cause death or serious physical harm before such condition or practice can be abated) issued under §107(a) of the FMSH Act;

 

(f)

The total dollar value of proposed assessments from MSHA under the FMSH Act;

 

(g)

The total number of mining-related fatalities; and

 

(h)

The total number of pending legal actions before the Federal Mine Safety and Health Review Commission as required by §1503(a)(3) of the Dodd-Frank Act; see Exhibit 99.1 for a complete listing of pending legal actions for each coal mine of which we or a subsidiary of ours is an operator.

 

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Mine		(a) #				(b) #				(c) #				(d) #				(e) #				( f ) $				(g) #				(h) #
Mine #7			9				—				—				—				—			$	7,069				—				—
Mine #5 (previously owned)			—				—				—				—				—			$	140,000				—				2
Mine #14			25				—				4				—				—			$	26,953				—				3

In addition, as required by the reporting requirements regarding coal mine safety included in §1503(a)(2) of the Dodd-Frank Act, for the three months ended September 30, 2010, none of our coal mines of which we are an operator, has received written notice from MSHA of:

 

(a)

a pattern of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to the cause and effect of coal or other mine health or safety hazards under §104(e) of the FMSH Act; or

 

(b)

the potential to have such a pattern.

 

Item 6.

Exhibits

The following exhibits are filed as part of this report:

 

Exhibit Number		Exhibit Title
2.1		Agreement and Plan of Merger, dated September 27, 2010, by and among National Coal Corp., Ranger Energy Investments, LLC and Ranger Coal Holdings, LLC (1)
10.1		Separation Agreement among William R. Snodgrass, National Coal Corp. and National Coal Corporation, effective September 10, 2010. (2)
10.2		Amendment to Employment Agreement, dated September 27, 2010, by and among National Coal Corp., National Coal Corporation and Daniel A. Roling. (1)
31.1		Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
31.2		Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
32.1		Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1		Pending legal actions before the Federal Mine Safety and Health Review Commission for each coal mine of which the Company is an operator as required by §1503(a)(3) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

(1)	Incorporated by reference to our Current Report on Form 8-K, filed on September 29, 2010.

(2)	Incorporated by reference to our Current Report on Form 8-K, filed on September 16, 2010.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

				NATIONAL COAL CORP.
Date: November 15, 2010						/ S /    L ES H. W AGNER
				By:		Les H. Wagner
				Its:		Acting Chief Financial Officer
						(Principal Financial and Accounting Officer)

 

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