Armstrong Energy, Inc. - FORM 10-Q - August 11, 2017

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EX-32.2 - EXHIBIT 32.2 - Armstrong Energy, Inc.arms-063017exhibit322.htm
EX-95.1 - EXHIBIT 95.1 - Armstrong Energy, Inc.arms-063017exhibit951.htm
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EX-31.1 - EXHIBIT 31.1 - Armstrong Energy, Inc.arms-063017exhibit311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-191182
 
armstronglogosnew.jpg
Armstrong Energy, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-8015664
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
 
7733 Forsyth Boulevard, Suite 1625
St. Louis, Missouri
 
63105
(Address of principal executive offices)
 
(Zip code)
(314) 721 – 8202
(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.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
 
Accelerated filer
 
¨
Non-accelerated filer
 
ý  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
As of August 10, 2017, there were 21,883,224 shares of Armstrong Energy, Inc.’s Common Stock outstanding.
 


TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Armstrong Energy, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
June 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
43,261

 
$
57,505

Accounts receivable
14,540

 
13,059

Inventories
11,926

 
11,809

Prepaid and other assets
4,375

 
2,539

Total current assets
74,102

 
84,912

Property, plant, equipment, and mine development, net
219,777

 
233,766

Investments
2,794

 
2,794

Other non-current assets
12,282

 
12,683

Total assets
$
308,955

 
$
334,155

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
13,811

 
$
16,941

Accrued and other liabilities
24,149

 
11,837

Current portion of capital lease obligations
104

 
555

Current maturities of long-term debt
203,506

 
8,217

Total current liabilities
241,570

 
37,550

Long-term debt, less current maturities
—

 
199,040

Long-term obligation to related party
171,115

 
147,536

Related party payables, net
—

 
22,557

Asset retirement obligations
14,711

 
14,056

Other non-current liabilities
7,866

 
7,223

Total liabilities
435,262

 
427,962

Stockholders’ deficit:
 
 
 
Common stock, $0.01 par value, 70,000,000 shares authorized, 21,883,224 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
219

 
219

Preferred stock, $0.01 par value, 1,000,000 shares authorized, zero shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
—

 
—

Additional paid-in-capital
238,681

 
238,675

Accumulated deficit
(363,784
)
 
(331,164
)
Accumulated other comprehensive loss
(1,446
)
 
(1,560
)
Armstrong Energy, Inc.’s deficit
(126,330
)
 
(93,830
)
Non-controlling interest
23

 
23

Total stockholders’ deficit
(126,307
)
 
(93,807
)
Total liabilities and stockholders’ deficit
$
308,955

 
$
334,155

See accompanying notes to unaudited condensed consolidated financial statements.

1

Armstrong Energy, Inc. and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
60,904

 
$
60,309

 
$
120,011

 
$
120,753

Costs and expenses:
 
 
 
 
 
 
 
Cost of coal sales, exclusive of items shown separately below
51,678

 
50,639

 
102,974

 
103,314

Production royalty to related party
1,891

 
1,711

 
3,751

 
3,340

Depreciation, depletion, and amortization
7,684

 
7,544

 
15,320

 
15,158

Asset retirement obligation expenses
341

 
340

 
670

 
669

Asset impairment and restructuring charges
3,382

 
3,381

 
3,382

 
3,381

General and administrative expenses
3,180

 
2,922

 
6,138

 
6,440

Operating loss
(7,252
)
 
(6,228
)
 
(12,224
)
 
(11,549
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(9,250
)
 
(8,549
)
 
(18,444
)
 
(16,657
)
Other, net
(909
)
 
(225
)
 
(2,189
)
 
(120
)
Loss before income taxes
(17,411
)
 
(15,002
)
 
(32,857
)
 
(28,326
)
Income taxes
237

 
—

 
237

 
(117
)
Net loss
(17,174
)
 
(15,002
)
 
(32,620
)
 
(28,443
)
Income attributable to non-controlling interest
—

 
—

 
—

 
—

Net loss attributable to common stockholders
$
(17,174
)
 
$
(15,002
)
 
$
(32,620
)
 
$
(28,443
)
See accompanying notes to unaudited condensed consolidated financial statements.

2

Armstrong Energy, Inc. and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(17,174
)
 
$
(15,002
)
 
$
(32,620
)
 
$
(28,443
)
Postretirement benefit plan and other employee benefit obligations, net of tax
57

 
78

 
114

 
155

Other comprehensive income
57

 
78

 
114

 
155

Comprehensive loss
(17,117
)
 
(14,924
)
 
(32,506
)
 
(28,288
)
Less: comprehensive income (loss) attributable to non-controlling interests
—

 
—

 
—

 
—

Comprehensive loss attributable to common stockholders
$
(17,117
)
 
$
(14,924
)
 
$
(32,506
)
 
$
(28,288
)
See accompanying notes to unaudited condensed consolidated financial statements.

3

Armstrong Energy, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
Six Months Ended June 30, 2017
(Amounts in thousands)
 
Common Stock
 
Preferred Stock
 
Additional
Paid-in-
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Non-Controlling
Interest
 
Total
Stockholders’
Deficit
 
Number of
Shares
 
Amount
 
Number of
Shares
 
Amount
 
Balance at December 31, 2016
21,883

 
$
219

 
—

 
$
—

 
$
238,675

 
$
(331,164
)
 
$
(1,560
)
 
$
23

 
$
(93,807
)
Net loss
—

 
—

 
—

 
—

 
—

 
(32,620
)
 
—

 
—

 
(32,620
)
Stock based compensation
—

 
—

 
—

 
—

 
6

 
—

 
—

 
—

 
6

Postretirement benefit plan and other employee benefit obligations, net of tax of zero
—

 
—

 
—

 
—

 
—

 
—

 
114

 
—

 
114

Balance at June 30, 2017
21,883

 
$
219

 
—

 
$
—

 
$
238,681

 
$
(363,784
)
 
$
(1,446
)
 
$
23

 
$
(126,307
)
See accompanying notes to unaudited condensed consolidated financial statements.

4

Armstrong Energy, Inc. and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 
Six Months Ended
June 30,
 
2017
 
2016
Cash Flows from Operating Activities:
 
 
 
Net loss
$
(32,620
)
 
$
(28,443
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Non-cash stock compensation expense (income)
6

 
(25
)
Income from equity affiliate
—

 
(64
)
Gain on disposal of property, plant and equipment
(720
)
 
—

Amortization of original issue discount
525

 
465

Amortization of debt issuance costs
736

 
827

Depreciation, depletion and amortization
15,320

 
15,158

Asset retirement obligation expenses
670

 
669

Asset impairment
3,382

 
3,381

Non-cash activity with related party, net
1,336

 
6,456

Non-cash interest on long-term obligations
11,750

 
8

Change in operating assets and liabilities:
 
 
 
Increase in accounts receivable
(1,480
)
 
(250
)
(Increase) decrease in inventories
(117
)
 
4,072

Increase in prepaid and other assets
(2,150
)
 
(1,284
)
Decrease (increase) in other non-current assets
392

 
(506
)
Decrease in accounts payable and accrued and other liabilities
(2,472
)
 
(8,946
)
Increase in other non-current liabilities
644

 
563

Net cash used in operating activities:
(4,798
)
 
(7,919
)
Cash Flows from Investing Activities:
 
 
 
Investment in property, plant, equipment, and mine development
(5,337
)
 
(1,593
)
Proceeds from disposal of fixed assets
1,504

 
—

Net cash used in investing activities
(3,833
)
 
(1,593
)
Cash Flows from Financing Activities:
 
 
 
Payments on capital lease obligations
(451
)
 
(1,265
)
Payments of long-term debt
(5,162
)
 
(3,948
)
Net cash used in financing activities
(5,613
)
 
(5,213
)
Net change in cash and cash equivalents
(14,244
)
 
(14,725
)
Cash and cash equivalents, at the beginning of the period
57,505

 
67,617

Cash and cash equivalents, at the end of the period
$
43,261

 
$
52,892

 
Six Months Ended
June 30,
 
2017
 
2016
Supplemental Cash Flow Information:
 
 
 
Non-Cash Transactions:
 
 
 
Assets acquired with long-term debt
$
150

 
$
886

Non-cash portion of land and reserve sale/financing with related party
$
22,243

 
$
16,413



5

Armstrong Energy, Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share and per acre amounts)

1. DESCRIPTION OF BUSINESS AND ENTITY STRUCTURE
Business
Armstrong Energy, Inc. and its subsidiaries and controlled entities (collectively, Armstrong or the Company) commenced business on September 19, 2006, for the purpose of owning and operating coal reserves (also referred to as mineral rights) and production assets. As of June 30, 2017, all subsidiaries are majority owned. The Company is a producer of low chlorine, high sulfur thermal coal from the Illinois Basin, operating both surface and underground mines. Armstrong, which is headquartered in St. Louis, Missouri, markets its coal primarily to electric utility companies as fuel for their steam-powered generators. As of June 30, 2017, the Company had approximately 624 employees, none of whom are under a collective bargaining arrangement.

Prior to September 1, 2016, the Company’s wholly-owned subsidiary, Elk Creek GP, LLC (ECGP), was the sole general partner of, and had an approximate 0.2% ownership in, Thoroughbred Resources, L.P. (Thoroughbred). The various limited partners of Thoroughbred are related parties, as the entity is majority owned by investment funds managed by Yorktown Partners LLC (Yorktown), which has a majority ownership in the Company. Effective September 1, 2016, Yorktown exercised its right under the Second Amended and Restated Agreement of Limited Partnership of Thoroughbred Resources, L.P. to remove ECGP as the general partner of Thoroughbred. The Company does not consolidate the financial results of Thoroughbred. See Note 6, "Related-Party Transactions," for further discussion.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting and U.S. Securities and Exchange Commission (SEC) regulations. In the opinion of management, all adjustments consisting of normal, recurring accruals considered necessary for a fair presentation have been included. Balance sheet information presented herein as of December 31, 2016 has been derived from the Company’s audited consolidated balance sheet at that date. Results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017. Certain prior year amounts have been reclassified to conform with the 2017 presentation. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2017.
Newly Adopted Accounting Standards and Accounting Standards Not Yet Implemented
In March 2017, the Financial Accounting Standards Board (FASB) issued guidance that changes how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the income statement. The new guidance requires the service cost component of net periodic benefit cost to be presented in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period with only the service cost component eligible for capitalization in assets. Other components of the net periodic benefit cost are to be stated separately from the line item(s) that includes the service cost and outside of operating income. These components are not eligible for capitalization in assets. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within that annual period, with early adoption permitted. The Company is currently assessing the impact that adopting this new standard will have on its consolidated financial statements.
In March 2016, the FASB issued guidance that simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an  option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain  classifications on the statement of cash flows. The Company adopted all provisions of this new accounting standard in the first  quarter of 2017 and changed its forfeiture policy to recognizing the impact of forfeitures when they occur from estimating  expected forfeitures in determining stock-based compensation expense. There was no material impact to the Company's financial statements.
In February 2016, the FASB issued updated guidance regarding the accounting for leases. This update requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the effect of this update on its consolidated financial statements.

6

In May 2014, the FASB issued a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard requires revenue to be recognized when promised goods or services are transferred to a customer in an amount that reflects the consideration expected in exchange for those goods or services. The standard permits the use of either the full retrospective or modified retrospective transition method. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted to the original effective date of December 15, 2016. The Company’s primary source of revenue is from the sale of coal through both short-term and long-term contracts, primarily with utilities, whereby revenue is currently recognized when risk of loss has passed to the customer. During 2016, the Company started its initial review of contracts with customers and does not currently anticipate any material change in the timing or method of recognizing revenue from our current practice.  As such, the Company does not believe this new standard will have a material impact on its results of operations, financial condition or cash flows.  The Company will adopt the new standard as of January 1, 2018, utilizing the modified retrospective method. However, the Company is still in the process of reviewing its contract portfolio and the relevant terms within each to assess the impact of adoption, including additional disclosures required by the standard.

2. LIQUIDITY AND GOING CONCERN
The principal indicators of the Company’s liquidity since the termination of its former asset-based credit facility dated December 21, 2012 (the 2012 Credit Facility) is cash on-hand. As more fully described below in Note 7, “Long-Term Debt,” the Company terminated the 2012 Credit Facility effective November 14, 2016. The Company’s available liquidity as of June 30, 2017 was $43,261, which was comprised solely of cash on hand.
The Company has experienced recurring losses from operations, which has led to a substantial decline in cash flows from operating activities over the previous 24 months. The Company’s current operating plan indicates that it will continue to incur losses from operations and generate negative cash flows from operating activities in the near-term. In addition, the Company entered into a settlement agreement, effective March 29, 2017, with Thoroughbred whereby the Company agreed, among other things, to begin paying Thoroughbred all production royalties earned on or after January 1, 2017 in cash, as permitted by the existing lease terms (the Settlement Agreement). See Note 6, “Related-Party Transactions,” for more information with respect to the Settlement Agreement.
Furthermore, the Company is currently in default pursuant to the terms of the Indenture (the Indenture) governing its 11.75% Senior Secured Notes due 2019 (the Notes) as a result of failing to make the $11,750 interest payment due on the Notes on June 15, 2017. On June 15, 2017, the Company exercised its right under the Indenture to enter into a 30-day grace period to defer the interest payment on the Notes. The Company did not make the June 15, 2017 interest payment within the 30-day grace period, and as such, an event of default occurred pursuant to the terms of the Indenture. Upon an event of default, the Trustee or the holders of at least 25% in aggregate principal amount of the Notes then outstanding may declare the principal of and accrued interest on the Notes to be immediately due and payable.
On July 16, 2017, the Company entered into a forbearance agreement (the Forbearance Agreement) with holders who collectively beneficially own or manage in excess of 75% of the aggregate principal amount of the Notes (the Holders), whereby the Holders have agreed to forbear from exercising their rights and remedies under the Indenture or the related security documents through the earlier of August 14, 2017 or an event of termination, as set forth in the Forbearance Agreement (the Forbearance Period) with respect to the default as a result of the Company’s failure to make the June 15, 2017 interest payment. Accordingly, the Company has classified the Notes as current liabilities in its unaudited condensed consolidated balance sheet as of June 30, 2017. See Note 7, "Long-Term Debt," for more information with respect to the Forbearance Agreement.
The Company also has other debt obligations entered into to finance the acquisition of certain equipment and land. Certain of these financing agreements include cross-default or cross-event of default provisions. As a result of the Company’s default under the Indenture, the lenders that are party to certain of these agreements could elect to declare some or all of the amounts outstanding as immediately due and payable. Therefore, the related debt obligations have been classified as current liabilities in the unaudited condensed consolidated balance sheet as of June 30, 2017.
The Company’s continuing operating losses, negative cash flow projections, Indenture default and other liquidity risks raise substantial doubt about whether the Company will meet its obligations as they become due over the next year. As a result of this, as well as the continued uncertainty around future coal fundamentals, the Company has concluded there exists substantial doubt regarding its ability to continue as a going concern.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and liabilities and commitments in the

7

normal course of business. The unaudited condensed consolidated financial statements for the three and six months ended June 30, 2017 do not include any adjustments that may result from uncertainty related to the Company's ability to continue as a going concern.
Due to the Company’s current financial outlook, it has undertaken steps to preserve its liquidity and manage operating costs, including controlling capital expenditures. Beginning in 2015, the Company undertook steps to enhance its financial flexibility and reduce cash outflows in the near term, including a streamlining of its cost structure and anticipated reductions in production volumes and capital expenditures. In addition, the Company has engaged financial and legal advisers to assist in restructuring its capital and evaluating other potential alternatives to address the impending liquidity constraints. With the assistance of its advisers, the Company is actively negotiating the terms of a restructuring with the Holders of the Notes with the objective of reaching an agreement by the end of the Forbearance Period. Until any definitive agreements are negotiated in their entirety and executed, and the transactions contemplated thereby are consummated, there can be no assurance that any restructuring transaction will be completed by the end of the Forbearance Period or at all. Furthermore, it may be difficult to come to an agreement that is acceptable to all of the Company’s creditors, and there can be no assurance that any restructuring will be possible at all. The Company’s failure to reach an agreement on the terms of a restructuring with its creditors, including the Holders, would have a material adverse effect on the Company’s liquidity, financial condition and results of operations. It may be necessary for the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring, or the Company’s creditors could force it into an involuntary bankruptcy or liquidation.
In June 2017, the Company entered into retention bonus agreements with certain executive officers and other key employees (Eligible Employees), whereby the Eligible Employees received a one-time lump sum cash payment.  Each of the payments is subject to clawback and repayment by the Eligible Employee in the event such officer or employee is terminated with cause or resigns without good reason before the one-year anniversary of the agreement. As the Company continues to work through its overall restructuring, it has determined that the retention bonus agreements were necessary to ensure the Company has the continued services of its management and key employees.  The aggregate amount of the retention bonus payments authorized by the Company’s Board of Directors totaled $1,672. For the three and six months ended June 30, 2017, a charge of $69 was recognized as a component of Other, net in the unaudited condensed consolidated statements of operations. The balance of the retention bonus payments will be expensed ratably over the remaining service period.

3. INVENTORIES
Inventories consist of the following amounts:
 
June 30, 2017
 
December 31, 2016
Materials and supplies
$
8,024

 
$
8,610

Coal—raw and saleable
3,902

 
3,199

Total
$
11,926

 
$
11,809


4. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following amounts:
 
June 30, 2017
 
December 31, 2016
Payroll and related benefits
$
4,749

 
$
4,804

Taxes other than income taxes
3,030

 
3,566

Interest
12,729

 
979

Asset retirement obligations
105

 
133

Royalties
1,832

 
610

Other
1,704

 
1,745

Total
$
24,149

 
$
11,837


On June 15, 2017, the Company elected to forgo an interest payment of $11,750 on its Notes and enter into the 30-day grace period under the Indenture. The Company did not make the June 15, 2017 interest payment within the 30-day grace period, and as a result, triggered an event of default under the terms of the Indenture. The Company and Holders of the Notes entered into a Forbearance Agreement on July 16, 2017, pursuant to which the Holders agreed to forbear from exercising their

8

rights and remedies under the Indenture or the related security documents through the Forbearance Period. See Note 7, "Long-Term Debt," for further discussion.

5. OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following amounts:
 
June 30, 2017
 
December 31, 2016
Escrows and deposits
$
4,851

 
$
5,216

Restricted surety and cash bonds
6,002

 
6,002

Advanced royalties
1,386

 
1,413

Intangible assets, net
43

 
52

Total
$
12,282

 
$
12,683


6. RELATED-PARTY TRANSACTIONS
Investments
Effective September 1, 2016, Yorktown exercised its right under the Second Amended and Restated Agreement of Limited Partnership of Thoroughbred Resources, LP to remove ECGP as the general partner of Thoroughbred. The Company received cash of $500 for its 0.2% general partner interest and recognized a pre-tax loss of $320 during the three months ended September 30, 2016. The Company continues to maintain a 0.9% interest in Thoroughbred through its subsidiary, Armstrong Energy Holdings, Inc., but, as a result of its removal as general partner, no longer has the ability to exercise significant influence over Thoroughbred. Therefore, effective September 1, 2016, the remaining interest being retained by the Company is being accounted for under the cost method.
Prior to September 1, 2016 when the Company’s investment in Thoroughbred was accounted for under the equity method, the Company recognized income from its equity interest of $35 and $64 for the three months and six months ended June 30, 2016, respectively.
Sale of Coal Reserves
The Company has executed the sale of an undivided interest in certain land and mineral reserves in Ohio and Muhlenberg counties of Kentucky (the Jointly-Owned Property) to Thoroughbred, through a series of transactions beginning in February 2011. Subsequently, the Company entered into lease agreements with Thoroughbred pursuant to which Thoroughbred granted the Company leases to its undivided interests in the mining properties acquired and licenses to mine and sell coal from those properties in exchange for a production royalty. Due to the Company’s continuing involvement in the Jointly-Owned Property, these transactions have been accounted for as financing arrangements. A long-term obligation has been established that is being amortized over the anticipated life of the mineral reserves, at an annual rate of 7% of the estimated gross revenue generated from the sale of the coal originating from the leased mineral reserves. In addition, effective February 2011, the Company and Thoroughbred entered into a Royalty Deferment and Option Agreement (the Royalty Agreement), whereby the Company has been granted an option to defer payment of any royalties earned by Thoroughbred on coal mined from these properties. Compensation for the aforementioned transactions has consisted of a combination of cash payments and the forgiveness of amounts owed by the Company, which primarily consisted of deferred royalties.
On June 1, 2016, the Company sold a 17.81% undivided interest in the Jointly-Owned Property to Thoroughbred in exchange for Thoroughbred forgiving amounts owed by the Company of $16,413. The amount forgiven consisted primarily of deferred production royalties. The newly acquired interest in the mineral reserves was leased and/or subleased by Thoroughbred to the Company in exchange for a production royalty. This transaction was accounted for as a financing arrangement and an additional long-term obligation to Thoroughbred of $16,413 was recognized on June 1, 2016.
The percentage interest in the Jointly-Owned Property sold to Thoroughbred in the above transaction was based on a fair value determined by a third-party specialist as of December 31, 2015. In addition, this transaction was approved by the conflicts committee of the board of directors of the Company, a committee including independent directors. As a result of the above, Thoroughbred’s undivided interest in the Jointly-Owned Property was increased to 79.19%.
Starting in December 2016, the Company received the first of multiple communications from Thoroughbred Holdings GP, LLC (Thoroughbred Holdings), the general partner of Thoroughbred, alleging certain claims associated with various transactions between the parties. Following a series of negotiations, Armstrong and certain of its affiliates, and Thoroughbred

9

Holdings and certain of its affiliates, entered into the Settlement Agreement, which, among other things, transferred the remaining 20.81% interest in the Jointly-Owned Property to Thoroughbred bringing Thoroughbred's undivided interest in the Jointly-Owned Property to 100.00%. See “- Settlement Agreement” below for further discussion of the dispute and ultimate resolution with Thoroughbred Holdings.
As of June 30, 2017 and December 31, 2016, the outstanding long-term obligation to related party totaled $171,115 and $147,536, respectively. Interest expense recognized for the three months ended June 30, 2017 and 2016 associated with the long-term obligation to related party was $2,668 and $1,767, respectively, and $5,295 and $3,354 for the six months ended June 30, 2017 and 2016, respectively. The effective interest rate of the long-term obligation to related party, which is adjusted based on significant mine plan changes, was 6.3% as of June 30, 2017.
Settlement Agreement
On December 16, 2016, the Company received notification from legal counsel for Thoroughbred Holdings, the general partner of Thoroughbred, disputing the calculation of deferred royalties and valuation of the Jointly-Owned Property pursuant to the terms of the Royalty Agreement. In the December 16th correspondence, counsel for Thoroughbred Holdings asserted that certain third-party valuations prepared in order to ascertain the amount of the Jointly-Owned Property to be transferred from us to Thoroughbred pursuant to the Royalty Agreement to satisfy production royalties due to Thoroughbred were inaccurate for fiscal year 2016 and prior years. Therefore, according to Thoroughbred, its ownership in the Jointly-Owned Property would have reached 100% during or prior to fiscal year 2016.
The Company promptly notified Thoroughbred that it disputed these assertions and requested information supporting Thoroughbred’s arguments. Following the Company’s request, in a letter dated January 6, 2017, Thoroughbred Holding’s CEO advised the Company that Thoroughbred, based on its analysis, concluded that Armstrong’s valuation of the remaining Jointly-Owned Property was significantly overstated, and using its valuation methodology, Thoroughbred would have been entitled to 100% ownership of the Jointly-Owned Property during the first half of 2016. Therefore, according to Thoroughbred’s calculations, cash payment of production royalties was required for a portion of the royalties incurred during 2016 and thereafter. In addition, Thoroughbred questioned several of the inputs utilized in the valuation by the Company during prior years, therefore challenging the validity of the prior land and reserve transfers.
By subsequent letter dated February 15, 2017, Thoroughbred clarified that its valuation analysis ascertained that the fair market value of the entirety of the Jointly-Owned Property as of December 31, 2016 was not more than $35,000. In addition, Thoroughbred insisted that applying more conservative inputs to the valuations of prior periods resulted in the underpayment of production royalties by not less than $26,000 and potentially in excess of $40,000 through December 31, 2016. Thoroughbred’s counsel, by separate letter dated February 15, 2017, also took exception to the Company’s calculation of the amount of deferred royalties for the year ended December 31, 2016, the amount of certain offsets from these deferred royalties by amounts due from Thoroughbred to Armstrong pursuant to an Administrative Services Agreement, and the offset of certain production royalties that the Company overpaid to Thoroughbred on properties other than the Jointly-Owned Property. The Company subsequently notified Thoroughbred of its continued disagreement with their claims.
As of December 31, 2016, amounts owed to Thoroughbred totaled $11,701, primarily representing deferred royalties incurred during calendar year 2016. Consistent with the previous annual land and reserve transfers pursuant to the Royalty Agreement, the Company proposed to transfer a 10.95% undivided interest in the Jointly-Owned Property in satisfaction of the amounts owed, which had been ascertained based on a fair market value determination obtained by the Company from an independent third-party. As noted above, Thoroughbred objected to this amount, asserting that, based on its own valuation, 10.95% was substantially undervalued. Following a series of negotiations to resolve the dispute, the Company and Thoroughbred entered into the Settlement Agreement effective March 29, 2017 in which the Company agreed to transfer, and Thoroughbred agreed to accept, an additional 9.86% undivided interest in Jointly-Owned Property for a total of 20.81%, bringing Thoroughbred’s interest in the Jointly-Owned Property to 100% as of January 1, 2017. The additional 9.86% undivided interest was expected to be earned by Thoroughbred during the first half of 2017 regardless of the settlement. Furthermore, as part of the Settlement Agreement, the Company and Thoroughbred agreed to mutual waivers and releases related to the Royalty Agreement, the payment of production royalties or any other sums due under the leases prior to January 1, 2017, and the Administrative Services Agreement. Thoroughbred also waived and released any prior claims against the Company for lost or wasted coal or mining practices and operational decisions made by the Company; any other demands, claims, or assertions set forth in the various communications from Thoroughbred Holdings and its legal counsel to the Company; and any other claims arising from the Company's administration of the leases prior to January 1, 2017. In addition, the Company agreed to begin paying Thoroughbred all production royalties earned on or after January 1, 2017 in cash pursuant to the existing lease terms, with royalties earned for January and February 2017 totaling $2,651 being paid on March 31, 2017.

10

By letter dated April 18, 2017, certain of the Holders of the Notes expressed certain objections to entry into the Settlement Agreement.
As a result of the Settlement Agreement, the Company recognized a non-cash charge in the year ending December 31, 2016 totaling $10,542 related to the 9.86% increase in the Jointly-Owned Property transferred to resolve the aforementioned disputes. In addition, the Jointly-Owned Property that was the subject of the dispute has been leased and/or subleased by Thoroughbred to the Company in exchange for a production royalty effective January 1, 2017. As a result of the Company's continuing involvement in the land and mineral reserves transferred to Thoroughbred, this transaction was accounted for as a financing arrangement, and, therefore, resulted in an increase to the long-term obligation to Thoroughbred totaling $22,243 as of January 1, 2017.
Lease of Coal Reserves
In February 2011, Thoroughbred entered into a lease and sublease agreement with the Company relating to its Elk Creek reserves and granted the Company a license to mine coal on those properties. The terms of this agreement mirror those of the lease agreements associated with the Jointly-Owned Property between the Company and Thoroughbred. Total production royalties owed from mining of the Elk Creek reserves, where the Company’s Kronos underground mine resides, for the three months ended June 30, 2017 and 2016 totaled $1,891 and $1,710, respectively, and for the six months ended June 30, 2017 and 2016 totaled $3,751 and $3,339, respectively.
Administrative Services Agreements
Effective as of January 1, 2011, the Company entered into an Administrative Services Agreement with Thoroughbred and its then current general partner, ECGP, pursuant to which the Company agreed to provide Thoroughbred with general administrative and management services, including, but not limited to, human resources, information technology, financial and accounting services and legal services. The administrative service fee, which was adjusted annually, was approved by the conflicts committee of the board of directors. In connection with ECGP's removal as general partner of Thoroughbred, the Company and Thoroughbred agreed to terminate the Administrative Services Agreement effective December 31, 2016. As consideration for the use of the Company’s employees and services, and for certain shared fixed costs, Thoroughbred paid the Company $235 and $471 for the three months and six months ended June 30, 2016, respectively.
Other
In 2007, the Company entered into an overriding royalty agreement with a former executive employee to compensate him $0.05/ton of coal mined and sold from properties owned by certain subsidiaries of the Company. The agreement remains in effect for the later of 20 years from the date of the agreement or until all salable coal has been extracted. The royalty agreement transfers with the property regardless of ownership or lease status. The royalty is payable the month following the sale of coal mined from the specified properties. The Company accounts for this royalty arrangement as expense in the period in which the coal is sold. Expense recorded in the three months ended June 30, 2017 and 2016 was $46 and $49, respectively, and $95 and $100 for the six months ended June 30, 2017 and 2016, respectively.

7. LONG-TERM DEBT
The Company’s total indebtedness consisted of the following:
Type
June 30, 2017
 
December 31, 2016
Notes
$
192,451

 
$
191,191

Other
11,055

 
16,066

 
203,506

 
207,257

Less: current maturities
203,506

 
8,217

Total long-term debt
$
—

 
$
199,040

Senior Secured Notes due 2019
On December 21, 2012, the Company completed a $200,000 offering of the 11.75% Notes. The Notes were issued at an original issue discount (OID) of 96.567%. The OID was recorded on the Company’s balance sheet as a component of long-term debt, and is being amortized to interest expense over the life of the Notes. As of June 30, 2017 and December 31, 2016, the

11

unamortized OID was $3,096 and $3,622, respectively. Interest on the Notes is due semiannually on June 15 and December 15 of each year. In addition, the Company used the proceeds to pay fees and expenses of $8,358 related to the Notes offering, which are being amortized to interest expense over the life of the Notes. As of June 30, 2017 and December 31, 2016, the unamortized deferred financing costs were $4,452 and $5,187, respectively.
On February 2, 2017, the Company received notice from legal counsel representing certain of the Holders of the Notes regarding an alleged Event of Default. See Note 12, "Commitments and Contingencies," for further information regarding this claim.
On June 15, 2017, the Company exercised its right under the Indenture governing the Notes to enter into a 30-day grace period to defer payment of interest of $11,750 on the Notes that was due on June 15, 2017. The Company elected to defer payment as it engaged in ongoing discussions with certain Holders who collectively beneficially own or manage a substantial majority of the Notes. The election to defer the June 15, 2017 interest payment during the 30-day grace period did not constitute an event of default as defined under the Indenture. However, the Company did not make the June 15, 2017 interest payment prior to the expiration of the 30-day grace period. As such, an event of default has occurred under the terms of the Indenture, and the Company has therefore classified the Notes as current liabilities in its unaudited condensed consolidated balance sheet as of June 30, 2017.
On July 16, 2017, the Company and certain subsidiaries of the Company entered into the Forbearance Agreement with the Holders, who hold approximately $158,000 in aggregate principal amount (representing approximately 79% of the outstanding principal amount) of the Notes issued pursuant to the Indenture. Pursuant to the Forbearance Agreement, the Holders have agreed to forbear from exercising their rights and remedies under the Indenture or the related security documents during the Forbearance Period with respect to the event of default arising under the Indenture.
The Forbearance Agreement is intended to provide the Company an opportunity to negotiate a restructuring of its indebtedness represented by the Notes with the Holders. The Company is actively negotiating with the Holders the terms of a restructuring with the objective of reaching agreement by the end of the Forbearance Period. Until any definitive agreements are negotiated in their entirety and executed, and the transactions contemplated thereby are consummated, there can be no assurance that any restructuring will be completed by the end of the forbearance period or at all. If the Company is not able to successfully negotiate and complete a restructuring of the Notes, it may be necessary to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring.
2012 Credit Facility
Concurrently with the closing of the Notes offering on December 21, 2012, the Company entered into the 2012 Credit Facility. The 2012 Credit Facility, which was subsequently terminated in November 2016, provided for a five year, $50,000 revolving credit facility that would expire on December 21, 2017. Borrowings under the 2012 Credit Facility could not exceed a borrowing base, as defined within the 2012 Credit Facility agreement. In addition, the 2012 Credit Facility included a $10,000 letter of credit sub-facility and a $5,000 swingline loan sub-facility. The Company incurred $1,198 of deferred financing fees related to the 2012 Credit Facility that were capitalized and amortized to interest expense over the life of the facility.
The 2012 Credit Facility included customary covenants that, among other things, required the Company at any time when (i) undrawn availability was less than the greater of (a) $10,000 or (b) an amount equal to 20% of the borrowing base or (ii) an event of default had occurred and was continuing, to maintain a fixed charge coverage ratio, as defined, calculated as of the end of each calendar month for the twelve months then ended, greater than 1.0 to 1.0. During 2016, the Company's fixed charge coverage ratio was less than 1.0-to-1.0, which would have required the Company to maintain minimum availability greater than $10,000 if any amounts were drawn on the 2012 Credit Facility. Since its inception, the Company had not borrowed under the 2012 Credit Facility, and, therefore, was not subject to the requirements of the financial covenants included within the agreement. Due to the restrictions imposed as a result of not maintaining the minimum fixed charge coverage ratio, the Company made the decision to terminate the 2012 Credit Facility effective November 14, 2016. Pursuant to this termination, the Company recognized a loss of $403 during the three months ended December 31, 2016 to write-off the remaining unamortized deferred financing costs associated with the 2012 Credit Facility.
Other Debt
Other debt consists of miscellaneous debt obligations entered into to finance the acquisition of certain equipment and land. These obligations have various maturities of one to five years and bear interest at rates between 2.99% to 6.50%. Certain of these financing agreements include cross-default or cross-event of default provisions. As a result of the Company's failure to make the scheduled interest payment on the Notes and subsequent event of default, the lenders party to certain of our other debt

12

agreements could elect to declare some or all of the amounts outstanding as immediately due and payable. Therefore, the related debt obligations have been classified as current liabilities in the unaudited condensed consolidated balance sheet as of June 30, 2017.

8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures the fair value of assets and liabilities using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1—observable inputs such as quoted prices in active markets; Level 2—inputs, other than quoted market prices in active markets, which are observable, either directly or indirectly; and Level 3—valuations derived from valuation techniques in which one or more significant inputs are unobservable. In addition, the Company may use various valuation techniques, including the market approach, using comparable market prices; the income approach, using the present value of future income or cash flow; and the cost approach, using the replacement cost of assets.
The Company’s financial instruments consist of cash equivalents, accounts receivable, cost method investment, long-term debt, and other long-term obligations. For cash equivalents, accounts receivable and other long-term obligations, the carrying amounts approximate fair value due to the short maturity and financial nature of the balances. The fair value of the cost method investment is not estimated, as it is impracticable to do so. The estimated fair market values of the Company’s Notes, which was determined using Level 2 inputs, and long-term obligation to related party, which was determined using Level 3 inputs, are as follows:
 
June 30, 2017
 
December 31, 2016
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Notes(1)
$
80,000

 
$
192,451

 
$
126,000

 
$
191,191

Long-term obligation to related party
126,042

 
171,115

 
113,106

 
147,536

Total
$
206,042

 
$
363,566

 
$
239,106

 
$
338,727


(1)
The carrying value of the Notes is net of the unamortized OID and deferred financing costs as of June 30, 2017 and December 31, 2016, respectively.
The fair value of the Notes is based on quoted market prices, while the fair value of the long-term obligation to related party is based on estimated cash flows discounted to their present value.

9. MINERAL RESERVE LEASE

In October 2010, the Company entered into a lease agreement for approximately 120,000 tons of recoverable coal reserves located in Union and Webster Counties, Kentucky in exchange for a production royalty. The initial term of the lease expired on June 1, 2016. In addition, the lease required the Company to provide the lessor with a certain amount of coal tonnage annually until production commenced on the leased reserve. The Company valued this coal tonnage using the prevailing average market price, and the advance royalty was recoupable against production royalties generated by future mining activity.

Upon expiration, the lease was renewed for an additional five-year term. The terms of the renewal stipulated a minimum annual rent payable with a specified amount of coal tonnage beginning on June 1, 2017. In addition, the lease allowed for the early termination of the agreement by the Company upon payment of a termination fee, as defined, which was zero through December 1, 2017. Lastly, the minimum annual rent, including amounts previously paid, would no longer be recoupable against future production royalties. As a result, the Company recognized a non-cash impairment charge of $3,381 during the three months ended June 30, 2016 to write-off advanced royalties associated with the aforementioned lease.
By letter dated May 10, 2017, the Company notified the lessor of its intent to cancel the lease agreement, effective May 31, 2017, and relinquished control of approximately 120,000 tons of mineral reserves. Because the Company terminated the lease agreement before December 1, 2017, no termination fee was due. As a result of the lease termination, the Company recognized a non-cash impairment charge of $3,382 during the three months ended June 30, 2017 to write-off certain capitalized costs associated with the development of the property.

13


10. INCOME TAXES
The Company has not recognized certain income tax benefits, as it does not believe it is more likely than not it will be able to realize its net deferred tax assets. The Company has, therefore, established a valuation allowance against its net deferred tax assets as of June 30, 2017 and December 31, 2016. Based on the anticipated reversals of its deferred tax assets and deferred tax liabilities, the Company has concluded a valuation allowance is necessary only for the excess of deferred tax assets over deferred tax liabilities.

11. EMPLOYEE BENEFIT PLANS
The Company provides certain health care benefits, including the reimbursement of a portion of out-of-pocket costs associated with insurance coverage, to qualifying salaried and hourly retirees and their dependents. Plan coverage for reimbursements will be provided to future hourly and salaried retirees in accordance with the plan document. The Company’s funding policy with respect to the plan is to fund the cost of all postretirement benefits as they are paid.
Net periodic postretirement benefit cost included the following components:
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Service cost for benefits earned
$
229

 
$
230

 
$
459

 
459

Interest cost on accumulated postretirement benefit obligation
49

 
43

 
99

 
86

Amortization of prior service cost
24

 
23

 
47

 
47

Net periodic postretirement cost
$
302

 
$
296

 
$
605

 
592

Effective September 1, 2017, the postretirement benefit program will be terminated and no further benefits will be provided to retirees.

12. ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in accumulated other comprehensive loss, net of tax, for the six months ended June 30, 2017 consisted of the following:
 
Postretirement
Benefit Plan
and Other
Employee
Benefit
Obligations
 
Accumulated
Other
Comprehensive
Loss
Balance as of December 31, 2016
$
(1,560
)
 
$
(1,560
)
Amounts reclassified from accumulated other comprehensive loss
114

 
114

Current period change
—

 
—

Balance as of June 30, 2017
$
(1,446
)
 
$
(1,446
)
The following is a summary of reclassifications out of accumulated other comprehensive loss for the three and six months ended June 30, 2017 and 2016:

14

Details about Accumulated Other
Comprehensive Income (Loss) Components
Affected Line  Item in the
Condensed  Consolidated Statement of Operations
 
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
For the
Three Months Ended
June 30,
 
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
For the
Six Months Ended
June 30,
 
 
 
2017
 
2016
 
2017
 
2016
Amortization of prior service cost associated with postretirement benefit plan and other employee benefit obligations
Cost of coal sales
 
$
(102
)
 
$
(103
)
 
$
(204
)
 
$
(205
)
Amortization of net actuarial gain associated with other employee benefit obligations
Cost of coal sales
 
45

 
25

 
90

 
50

 
 
 
(57
)
 
(78
)
 
(114
)
 
(155
)
Income taxes
 
 
—

 
—

 
—

 
—

Total reclassifications
 
 
$
(57
)
 
$
(78
)
 
$
(114
)
 
$
(155
)

13. COMMITMENTS AND CONTINGENCIES
The Company is subject to various market, operational, financial, regulatory, and legislative risks. Numerous federal, state, and local governmental permits and approvals are required for mining operations. Federal and state regulations require regular monitoring of mines and other facilities to document compliance. Monetary penalties of $1,085 and $1,008 related to Mine Safety and Health Administration (MSHA) fines were accrued as of June 30, 2017 and December 31, 2016, respectively.
The Company is involved from time to time in various legal matters arising in the ordinary course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company’s consolidated cash flows, results of operations or financial condition. A summary of the significant legal matters is below.
Litigation
On July 20, 2016, the Company was notified by an Assistant U.S. Attorney for the Western District of Kentucky of an investigation into potential charges against Armstrong Coal Company, Inc., a wholly-owned subsidiary of the Company (Armstrong Coal Company), and one or more of its current and former employees arising from alleged inaccurate respirable dust sampling at certain of the Company's underground mines. In November 2016, seven current and former Armstrong Coal Company employees received individual target letters from the Assistant U.S. Attorney. In January 2014, MSHA issued a 104(d) citation to the Parkway underground mine related to inaccurate respirable dust sampling, which the Company has challenged. In addition, a Parkway underground mine employee was terminated. The impact of any charges against the Company or its current and former employees cannot be determined at this time, and the Company intends to vigorously defend any such charges should they be pursued.
Claim of Event of Default by Bondholders    
On December 30, 2016, Rhino Resource Partners Holdings, LLC (Rhino Holdings), an entity wholly-owned by Yorktown, together with Rhino Resource Partners LP (Rhino), Royal Energy Resources, Inc., and Rhino GP LLC entered into a put and call option agreement whereby Rhino received a call option, and Rhino Holdings received a put option, on all of the outstanding common stock of the Company currently held by Yorktown (the Option), the majority owner of the Company's outstanding common stock, under certain circumstances. The Option provides that Rhino can exercise the Option after 60 days following entry of an agreement regarding the restructuring of the Notes, but in no event earlier than January 1, 2018 and no later than December 31, 2019. In exchange for Rhino Holdings granting Rhino the Option to purchase Yorktown’s holdings of Armstrong Energy stock, Rhino issued 5.0 million common units to Rhino Holdings upon the execution of the Option.
 
In connection with entry into the Option by the aforementioned parties, on February 2, 2017, the Company received notice from certain of the Holders of the Notes that the Holders believe entry into the Option by the third-parties constitutes a Change of Control, as defined in the Indenture governing the Notes, and that an Event of Default occurred, as defined in the Indenture, when the Company failed to offer to purchase the Notes within 30 days following the purported Change of Control.  This position was reiterated in a letter from such Holders dated April 18, 2017. The Holders are not currently pursuing remedies under the Indenture related to the alleged Event of Default, but have reserved their rights to do so at a future time. In addition, certain of the Company's financing agreements include cross-default or cross-event of default provisions,

15

which, if the aforementioned assertions were proven to be accurate, would result indirectly in an Event of Default under such financing arrangements.

The Company believes that neither a Change of Control nor a related Event of Default under the Indenture has occurred. To that end, the Company has advised the Holders that it disputes the allegations. No further action associated with these claims has been taken to date by the Company or the Holders.
Coal Sales Contracts
The Company has historically sold the majority of its coal under multi-year supply agreements of varying duration. These contracts typically have specific volume and pricing arrangements for each year of the agreement, which allows customers to secure a supply for their future needs and provides the Company with greater predictability of sales volume and sales prices. Quantities sold under some of these contracts may vary from year to year within certain limits at the option of the customer or the Company. The remaining terms of the Company’s long-term contracts range from one to four years. The Company, via contractual agreements, has committed volumes of sales in 2017 of approximately 5.3 million tons.

14. SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
In accordance with the Indenture governing the Notes, certain wholly-owned subsidiaries of the Company (each, a Guarantor Subsidiary) have fully and unconditionally guaranteed the Notes, on a joint and several basis, subject to certain customary release provisions. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management believes that such information is not material to the holders of the Notes. The following historical financial statement information is provided for the Guarantor Subsidiaries. The non-guarantor subsidiaries are considered to be “minor” as the term is defined in Rule 3-10 of Regulation S-X promulgated by the SEC, and the financial position, results of operations, and cash flows of the non-guarantor subsidiaries are, therefore, included in the condensed financial data of the Guarantor Subsidiaries.

16

Unaudited Supplemental Condensed Consolidating Balance Sheets
 
June 30, 2017
 
Parent /
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
43,261

 
$
—

 
$
43,261

Accounts receivable
—

 
14,540

 
—

 
14,540

Inventories
—

 
11,926

 
—

 
11,926

Prepaid and other assets
2,248

 
2,127

 
—

 
4,375

Total current assets
2,248

 
71,854

 
—

 
74,102

Property, plant, equipment, and mine development, net
8,552

 
211,225

 
—

 
219,777

Investments
—

 
2,794

 
—

 
2,794

Investments in subsidiaries
28,126

 
—

 
(28,126
)
 
—

Intercompany receivables
40,209

 
(40,209
)
 
—

 
—

Other non-current assets
180

 
12,102

 
—

 
12,282

Total assets
$
79,315

 
$
257,766

 
$
(28,126
)
 
$
308,955

LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
261

 
$
13,550

 
$
—

 
$
13,811

Accrued and other liabilities
12,856

 
11,293

 
—

 
24,149

Current portion of capital lease obligations
—

 
104

 
—

 
104

Current maturities of long-term debt
192,451

 
11,055

 
—

 
203,506

Total current liabilities
205,568

 
36,002

 
—

 
241,570

Long-term obligation to related party
—

 
171,115

 
—

 
171,115

Asset retirement obligations
—

 
14,711

 
—

 
14,711

Other non-current liabilities
77

 
7,789

 
—

 
7,866

Total liabilities
205,645

 
229,617

 
—

 
435,262

Stockholders’ equity/(deficit):
 
 
 
 
 
 
 
Armstrong Energy, Inc.’s equity/(deficit)
(126,330
)
 
28,126

 
(28,126
)
 
(126,330
)
Non-controlling interest
—

 
23

 
—

 
23

Total stockholders’ equity/(deficit)
(126,330
)
 
28,149

 
(28,126
)
 
(126,307
)
Total liabilities and stockholders’ equity/(deficit)
$
79,315

 
$
257,766

 
$
(28,126
)
 
$
308,955


17

Supplemental Condensed Consolidating Balance Sheets
 
December 31, 2016
 
Parent /
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
57,505

 
$
—

 
$
57,505

Accounts receivable
—

 
13,059

 
—

 
13,059

Inventories
—

 
11,809

 
—

 
11,809

Prepaid and other assets
849

 
1,690

 
—

 
2,539

Total current assets
849

 
84,063

 
—

 
84,912

Property, plant, equipment, and mine development, net
9,948

 
223,818

 
—

 
233,766

Investments
—

 
2,794

 
—

 
2,794

Investments in subsidiaries
42,092

 
—

 
(42,092
)
 
—

Intercompany receivables
45,643

 
(45,643
)
 
—

 
—

Other non-current assets
180

 
12,503

 
—

 
12,683

Total assets
$
98,712

 
$
277,535

 
$
(42,092
)
 
$
334,155

LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
302

 
$
16,639

 
$
—

 
$
16,941

Accrued and other liabilities
1,578

 
10,259

 
—

 
11,837

Current portion of capital lease obligations
—

 
555

 
—

 
555

Current maturities of long-term debt
—

 
8,217

 
—

 
8,217

Total current liabilities
1,880

 
35,670

 
—

 
37,550

Long-term debt, less current maturities
191,191

 
7,849

 
—

 
199,040

Long-term obligation to related party
—

 
147,536

 
—

 
147,536

Related party payables, net
(628
)
 
23,185

 
—

 
22,557

Asset retirement obligations
—

 
14,056

 
—

 
14,056

Long-term portion of capital lease obligations
—

 
—

 
—

 
—

Other non-current liabilities
99

 
7,124

 
—

 
7,223

Total liabilities
192,542

 
235,420

 
—

 
427,962

Stockholders’ equity/(deficit):
 
 
 
 
 
 
 
Armstrong Energy, Inc.’s equity/(deficit)
(93,830
)
 
42,092

 
(42,092
)
 
(93,830
)
Non-controlling interest
—

 
23

 
—

 
23

Total stockholders’ equity/(deficit)
(93,830
)
 
42,115

 
(42,092
)
 
(93,807
)
Total liabilities and stockholders’ equity/(deficit)
$
98,712

 
$
277,535

 
$
(42,092
)
 
$
334,155


18

Unaudited Supplemental Condensed Consolidating Statements of Operations
 
Three Months Ended June 30, 2017
 
Parent /
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
—

 
$
60,904

 
$
—

 
$
60,904

Costs and expenses:
 
 
 
 
 
 
 
Operating costs and expenses
—

 
51,678

 
—

 
51,678

Production royalty to related party
—

 
1,891

 
—

 
1,891

Depreciation, depletion, and amortization
223

 
7,461

 
—

 
7,684

Asset retirement obligation expenses
—

 
341

 
—

 
341

Asset impairment and restructuring charges
1,218

 
2,164

 
—

 
3,382

General and administrative expenses
689

 
2,491

 
—

 
3,180

Operating loss
(2,130
)
 
(5,122
)
 
—

 
(7,252
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(6,380
)
 
(2,870
)
 
—

 
(9,250
)
Other, net
(1,676
)
 
767

 
—

 
(909
)
Loss from investment in subsidiaries
(6,988
)
 
—

 
6,988

 
—

Loss before income taxes
(17,174
)
 
(7,225
)
 
6,988

 
(17,411
)
Income taxes
—

 
237

 
—

 
237

Net loss
(17,174
)
 
(6,988
)
 
6,988

 
(17,174
)
Income attributable to non-controlling interest
—

 
—

 
—

 
—

Net loss attributable to common stockholders
$
(17,174
)
 
$
(6,988
)
 
$
6,988

 
$
(17,174
)

 
Three Months Ended June 30, 2016
 
Parent /
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
—

 
$
60,309

 
$
—

 
$
60,309

Costs and expenses:
 
 
 
 
 
 
 
Operating costs and expenses
—

 
50,639

 
—

 
50,639

Production royalty to related party
—

 
1,711

 
—

 
1,711

Depreciation, depletion, and amortization
303

 
7,241

 
—

 
7,544

Asset retirement obligation expenses
—

 
340

 
—

 
340

General and administrative expenses
321

 
2,601

 
—

 
2,922

Operating loss
(624
)
 
(5,604
)
 
—

 
(6,228
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(6,382
)
 
(2,167
)
 
—

 
(8,549
)
Other, net
(451
)
 
226

 
—

 
(225
)
Loss from investment in subsidiaries
(7,545
)
 
—

 
7,545

 
—

Loss before income taxes
(15,002
)
 
(7,545
)
 
7,545

 
(15,002
)
Income taxes
—

 
—

 
—

 
—

Net loss
(15,002
)
 
(7,545
)
 
7,545

 
(15,002
)
Income attributable to non-controlling interest
—

 
—

 
—

 
—

Net loss attributable to common stockholders
$
(15,002
)
 
$
(7,545
)
 
$
7,545

 
$
(15,002
)


19

 
Six Months Ended June 30, 2017
 
Parent /
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
—

 
120,011

 
$
—

 
120,011

Costs and expenses:
 
 
 
 
 
 
 
Operating costs and expenses
—

 
102,974

 
—

 
102,974

Production royalty to related party
—

 
3,751

 
—

 
3,751

Depreciation, depletion, and amortization
454

 
14,866

 
—

 
15,320

Asset retirement obligation expenses
—

 
670

 
—

 
670

Asset impairment and restructuring charges
1,218

 
2,164

 
 
 
3,382

General and administrative expenses
1,269

 
4,869

 
—

 
6,138

Operating loss
(2,941
)
 
(9,283
)
 
—

 
(12,224
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(12,735
)
 
(5,709
)
 
—

 
(18,444
)
Other, net
(2,978
)
 
789

 
—

 
(2,189
)
Loss from investment in subsidiaries
(13,966
)
 
—

 
13,966

 
—

Loss before income taxes
(32,620
)
 
(14,203
)
 
13,966

 
(32,857
)
Income taxes
—

 
237

 
—

 
237

Net loss
(32,620
)
 
(13,966
)
 
13,966

 
(32,620
)
Income attributable to non-controlling interest
—

 
—

 
—

 
—

Net loss attributable to common stockholders
$
(32,620
)
 
$
(13,966
)
 
$
13,966

 
$
(32,620
)


 
Six Months Ended June 30, 2016
 
Parent /
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
—

 
$
120,753

 
$
—

 
$
120,753

Costs and expenses:
 
 
 
 
 
 
 
Operating costs and expenses
—

 
103,314

 
—

 
103,314

Production royalty to related party
—

 
3,340

 
—

 
3,340

Depreciation, depletion, and amortization
605

 
14,553

 
—

 
15,158

Asset retirement obligation expenses
—

 
669

 
—

 
669

General and administrative expenses
760

 
5,680

 
—

 
6,440

Operating loss
(1,365
)
 
(10,184
)
 
—

 
(11,549
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(12,699
)
 
(3,958
)
 
—

 
(16,657
)
Other, net
(451
)
 
331

 
—

 
(120
)
Loss from investment in subsidiaries
(13,928
)
 
—

 
13,928

 
—

Loss before income taxes
(28,443
)
 
(13,811
)
 
13,928

 
(28,326
)
Income taxes
—

 
(117
)
 
—

 
(117
)
Net loss
(28,443
)
 
(13,928
)
 
13,928

 
(28,443
)
Income attributable to non-controlling interest
—

 
—

 
—

 
—

Net loss attributable to common stockholders
$
(28,443
)
 
$
(13,928
)
 
$
13,928

 
$
(28,443
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


20

Unaudited Supplemental Condensed Consolidating Statements of Comprehensive Income (Loss)
 
Three Months Ended June 30, 2017
 
Parent /
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net loss
$
(17,174
)
 
$
(6,988
)
 
$
6,988

 
$
(17,174
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Postretirement benefit plan and other employee benefit obligations, net of tax
—

 
57

 
—

 
57

Other comprehensive income
—

 
57

 
—

 
57

Comprehensive loss
(17,174
)
 
(6,931
)
 
6,988

 
(17,117
)
Less: comprehensive income (loss) attributable to non-controlling interest
—

 
—

 
—

 
—

Comprehensive loss attributable to common stockholders
$
(17,174
)
 
$
(6,931
)
 
$
6,988

 
$
(17,117
)
 
Three Months Ended June 30, 2016
 
Parent /
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net loss
$
(15,002
)
 
$
(7,545
)
 
$
7,545

 
$
(15,002
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Postretirement benefit plan and other employee benefit obligations, net of tax
—

 
78

 
—

 
78

Other comprehensive income
—

 
78

 
—

 
78

Comprehensive loss
(15,002
)
 
(7,467
)
 
7,545

 
(14,924
)
Less: comprehensive income (loss) attributable to non-controlling interest
—

 
—

 
—

 
—

Comprehensive loss attributable to common stockholders
$
(15,002
)
 
$
(7,467
)
 
$
7,545

 
$
(14,924
)

 
Six Months Ended June 30, 2017
 
Parent /
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net loss
$
(32,620
)
 
$
(13,966
)
 
$
13,966

 
$
(32,620
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Postretirement benefit plan and other employee benefit obligations, net of tax
—

 
114

 
—

 
114

Other comprehensive income
—

 
114

 
—

 
114

Comprehensive loss
(32,620
)
 
(13,852
)
 
13,966

 
(32,506
)
Less: comprehensive income (loss) attributable to non-controlling interest
—

 
—

 
—

 
—

Comprehensive loss attributable to common stockholders
$
(32,620
)
 
$
(13,852
)
 
$
13,966

 
$
(32,506
)

21

 
Six Months Ended June 30, 2016
 
Parent /
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net loss
$
(28,443
)
 
$
(13,928
)
 
$
13,928

 
$
(28,443
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Postretirement benefit plan and other employee benefit obligations, net of tax
—

 
155

 
—

 
155

Other comprehensive income
—

 
155

 
—

 
155

Comprehensive loss
(28,443
)
 
(13,773
)
 
13,928

 
(28,288
)
Less: comprehensive income (loss) attributable to non-controlling interest
—

 
—

 
—

 
—

Comprehensive loss attributable to common stockholders
$
(28,443
)
 
$
(13,773
)
 
$
13,928

 
$
(28,288
)












22


Unaudited Supplemental Condensed Consolidating Statements of Cash Flows
 
Six Months Ended June 30, 2017
 
Parent /
Issuer
 
Guarantor
Subsidiaries
 
Consolidated
Cash Flows from Operating Activities:
 
 
 
 
 
Net cash (used in) provided by operating activities:
$
(5,159
)
 
$
361

 
$
(4,798
)
Cash Flows from Investing Activities:
 
 
 
 
 
Investment in property, plant, equipment, and mine development
(275
)
 
(5,062
)
 
(5,337
)
Proceeds from disposal of fixed assets
—

 
1,504

 
1,504

Net cash used in investing activities
(275
)
 
(3,558
)
 
(3,833
)
Cash Flows from Financing Activities:
 
 
 
 
 
Payment on capital lease obligations
—

 
(451
)
 
(451
)
Payment of long-term debt
—

 
(5,162
)
 
(5,162
)
Transactions with affiliates, net
5,434

 
(5,434
)
 
—

Net cash provided by (used in) financing activities
5,434

 
(11,047
)
 
(5,613
)
Net change in cash and cash equivalents
—

 
(14,244
)
 
(14,244
)
Cash and cash equivalents, at the beginning of the period
—

 
57,505

 
57,505

Cash and cash equivalents, at the end of the period
$
—

 
$
43,261

 
$
43,261

 
Six Months Ended June 30, 2016
 
Parent /
Issuer
 
Guarantor
Subsidiaries
 
Consolidated
Cash Flows from Operating Activities:
 
 
 
 
 
Net cash (used in) provided by operating activities:
$
(13,560
)
 
$
5,641

 
$
(7,919
)
Cash Flows from Investing Activities:
 
 
 
 
 
Investment in property, plant, equipment, and mine development
(386
)
 
(1,207
)
 
(1,593
)
Proceeds from disposal of fixed assets
—

 
—

 
—

Net cash used in investing activities
(386
)
 
(1,207
)
 
(1,593
)
Cash Flows from Financing Activities:
 
 
 
 
 
Payment on capital lease obligations
—

 
(1,265
)
 
(1,265
)
Payment of long-term debt
—

 
(3,948
)
 
(3,948
)
Transactions with affiliates, net
13,946

 
(13,946
)
 
—

Net cash provided by (used in) financing activities
13,946

 
(19,159
)
 
(5,213
)
Net change in cash and cash equivalents
—

 
(14,725
)
 
(14,725
)
Cash and cash equivalents, at the beginning of the period
—

 
67,617

 
67,617

Cash and cash equivalents, at the end of the period
$
—

 
$
52,892

 
$
52,892


23

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the SEC) on March 31, 2017.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Various statements contained in this quarterly report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenues, income and capital spending. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. The forward-looking statements in this quarterly report speak only as of the date of this quarterly report; we disclaim any obligation to update these statements unless required by law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, contingencies and uncertainties include, but are not limited to, the following:

•
our ability to continue as a going concern within one year beyond the filing of this Quarterly Report on Form 10-Q;

•
liquidity constraints and our ability to service our outstanding indebtedness;

•
our ability to comply with the restrictions imposed by the indenture governing our notes and other financing arrangements;

•
market demand for coal and electricity;

•
geologic conditions, weather and other inherent risks of coal mining that are beyond our control;

•
competition within our industry and with producers of competing energy sources;

•
excess production and production capacity;

•
our ability to acquire or develop coal reserves in an economically feasible manner;

•
inaccuracies in our estimates of our coal reserves;

•
availability and price of mining and other industrial supplies, including steel-based supplies, diesel fuel, rubber tires and explosives;

•
the continued weakness in global economic conditions or in any industry in which our customers operate, or sustained uncertainty in financial markets, which may cause conditions we cannot predict;

•
coal users switching to other fuels in order to comply with various environmental standards related to coal combustion;

•
volatility in the capital and credit markets;

•
availability of skilled employees and other workforce factors;

•
our ability to collect payments from our customers;

24


•
defects in title or the loss of a leasehold interest;

•
railroad, barge, truck and other transportation performance costs;

•
our ability to secure new coal supply arrangements or to renew existing coal supply arrangements, as a result of our current financial condition;

•
the deferral of contracted shipments of coal by our customers;

•
our ability to obtain or renew surety bonds on acceptable terms;

•
our ability to obtain and renew various permits, including permits authorizing the disposition of certain mining waste;

•
existing and future legislation and regulations affecting both our coal mining operations and our customers’ coal usage, governmental policies and taxes, including those aimed at reducing emissions of elements such as mercury, sulfur dioxide, nitrogen oxides, or toxic gases, such as hydrogen chloride, particulate matter or greenhouse gases;

•
the accuracy of our estimates of reclamation and other mine closure obligations;

•
our ability to attract and retain key management personnel; and

•
efforts to organize our workforce for representation under a collective bargaining agreement.
When considering these forward-looking statements, you should keep in mind the cautionary statements in this document and in our other SEC filings, including the more detailed discussion of these factors and other factors that could affect our results included in Item 1A, “Risk Factors,” in our Annual Report on Form 10-K filed with the SEC on March 31, 2017, as may be updated in subsequent filings with the SEC.
Overview
Armstrong Energy, Inc. (together with its subsidiaries, we, Armstrong, or the Company) is a producer of low chlorine, high sulfur thermal coal from the Illinois Basin, with both surface and underground mines. We market our coal primarily to proximate and investment-grade electric utility companies as fuel for their steam-powered generators. Based on 2016 production, we are the sixth largest producer in the Illinois Basin and the second largest in Western Kentucky. We were formed in 2006 to acquire and develop a large coal reserve holding. We commenced production in the second quarter of 2008 and currently operate five mines, including three surface and two underground. As of June 30, 2017, we controlled approximately 445 million tons of proven and probable coal reserves. We also own and operate three coal processing plants, which support our mining operations. From our reserves, we mine coal from multiple seams that, in combination with our coal processing facilities, enhance our ability to meet customer requirements for blends of coal with different characteristics. The locations of our coal reserves and operations, adjacent to the Green River, together with our river dock coal handling and rail loadout facilities, allow us to optimize coal blending and handling, and provide our customers with rail, barge and truck transportation options.
We market our coal primarily to large utilities with coal-fired, base-load, scrubbed power plants under multi-year coal supply agreements. Our multi-year coal supply agreements usually have specific volume and pricing arrangements for each year of the agreement. These agreements allow customers to secure a supply for their future needs and provide us with greater predictability of sales volume and sales prices. At June 30, 2017, we had coal supply agreements with terms ranging from one to four years. As of June 30, 2017, we are contractually committed to sell approximately 5.3 million tons of coal in 2017.
Going Concern
We have experienced recurring losses from operations, which has led to a substantial decline in cash flows from operating activities. Our current operating plan indicates that we will continue to incur losses from operations and generate negative cash flows from operating activities. In addition, we entered into a settlement agreement with our affiliate, Thoroughbred Resources, L.P. (Thoroughbred), effective March 29, 2017, whereby we agreed, among other things, to begin paying Thoroughbred all production royalties earned on or after January 1, 2017 in cash, as permitted by the existing lease terms (the

25

Settlement Agreement) (see Note 6, "Related-Party Transactions," to our unaudited consolidated financial statements for more information with respect to the Settlement Agreement).
Furthermore, the Company is currently in default pursuant to the terms of the Indenture (the Indenture) governing its 11.75% Senior Secured Notes due 2019 (the Notes) as a result of failing to make the $11.75 million interest payment due on the Notes on June 15, 2017. On June 15, 2017, the Company exercised its right under the Indenture to enter into a 30-day grace period to defer the interest payment on the Notes. The Company did not make the June 15, 2017 interest payment within the 30-day grace period, and as such, an event of default occurred pursuant to the terms of the Indenture. Upon an event of default, the Trustee or the holders of at least 25% in aggregate principal amount of the Notes then outstanding may declare the principal of and accrued interest on the Notes to be immediately due and payable.
On July 16, 2017, the Company entered into a forbearance agreement (the Forbearance Agreement) with holders who collectively beneficially own or manage in excess of 75% of the aggregate principal amount of the Notes (the Holders), whereby the Holders have agreed to forbear from exercising their rights and remedies under the Indenture or the related security documents through the earlier of August 14, 2017 or an event of termination, as set forth in the Forbearance Agreement (the Forbearance Period) with respect to the default as a result of the Company’s failure to make the June 15, 2017 interest payment. Accordingly, the Company has classified the Notes as current liabilities in its unaudited condensed consolidated balance sheet as of June 30, 2017. See Note 7, "Long-Term Debt," to our unaudited consolidated financial statements for more information with respect to the Forbearance Agreement.
We also have other debt obligations entered into to finance the acquisition of certain equipment and land. Certain of these financing agreements include cross-default or cross-event of default provisions. As a result of our default under the Indenture, the lenders that are party to certain of these agreements could elect to declare some or all of the amounts outstanding as immediately due and payable.
The Company’s continuing operating losses, negative cash flow projections, Indenture default and other liquidity risks raise substantial doubt about whether the Company will meet its obligations as they become due over the next year. As a result of this, as well as the continued uncertainty around future coal fundamentals, the Company has concluded there exists substantial doubt regarding its ability to continue as a going concern.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and liabilities and commitments in the normal course of business. The unaudited condensed consolidated financial statements for the three and six months ended June 30, 2017 do not include any adjustments that may result from uncertainty related to the Company's ability to continue as a going concern.
Due to our current financial outlook, we have undertaken steps to preserve our liquidity and manage operating costs, including controlling capital expenditures. Beginning in 2015, we undertook steps to enhance our financial flexibility and reduce cash outflows in the near term, including a streamlining of our cost structure and anticipated reductions in production volumes and capital expenditures. In addition, we have engaged financial and legal advisers to assist in restructuring our capital and evaluating other potential alternatives to address the impending liquidity constraints. With the assistance of our advisers, we are actively negotiating the terms of a restructuring with the Holders of the Notes with the objective of reaching an agreement by the end of the Forbearance Period. Until any definitive agreements are negotiated in their entirety and executed, and the transactions contemplated thereby are consummated, there can be no assurance that any restructuring transaction will be completed by the end of the Forbearance Period or at all. Furthermore, it may be difficult to come to an agreement that is acceptable to all of our creditors, and there can be no assurance that any restructuring will be possible at all. Failure to reach an agreement on the terms of a restructuring with our creditors, including the Holders, would have a material adverse effect on our liquidity, financial condition and results of operations. It may be necessary for us to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring, or our creditors could force us into an involuntary bankruptcy or liquidation.
Recent Events
Forbearance Agreement
As disclosed above, on July 16, 2017, Armstrong and certain of our subsidiaries (the Guarantors and, together with the Company, the Obligors) entered into the Forbearance Agreement with the Holders of approximately $158 million in aggregate principal amount (representing approximately 79% of the outstanding principal amount) of the Company’s outstanding Notes issued pursuant to the Indenture. Pursuant to the Forbearance Agreement, the Holders have agreed to forbear from exercising

26

their rights and remedies under the Indenture or the related security documents as a result of the event of default due to the Company’s failure to make the $11.75 million June 15, 2017 interest payment on the Notes until the expiration of the Forbearance Period. The Holders have also agreed to not transfer any ownership in the Notes held by any of the Holders during the Forbearance Period other than to potential transferees currently parties to or who agree in writing to be bound by the Forbearance Agreement. With the assistance of our advisers, we are actively negotiating the terms of a restructuring with the Holders of the Notes with the objective of reaching an agreement by the end of the Forbearance Period. Until any definitive agreements are negotiated in their entirety and executed, and the transactions contemplated thereby are consummated, there can be no assurance that any restructuring transaction will be completed by the end of the Forbearance Period or at all.
Termination of Lease Agreement
As previously disclosed, on June 1, 2016, Armstrong Coal Company, Inc. (ACC), a wholly-owned subsidiary of the Company, entered into a coal mining lease (the Lease Agreement) with Alcoa Fuels, Inc. (Alcoa) for the right to mine the No. 6 coal seam, and all coal lying above the No. 6 coal seam, underlying certain property in Union and Webster Counties, Kentucky. By letter dated May 10, 2017, ACC notified Alcoa of its intent to cancel the Lease Agreement, effective May 31, 2017. As a result of the lease cancellation, Armstrong will relinquish control of approximately 120 million tons of mineral reserves. No termination fees were incurred in connection with the cancellation of the Lease Agreement. As a result of the lease termination, the Company recognized a non-cash impairment charge of approximately $3.4 million during the three months ended June 30, 2017 to write-off certain capitalized costs associated with the future development of the property.
Retention Bonus Agreements
In June 2017, we entered into retention bonus agreements with certain executive officers and other key employees (Eligible Employees), whereby the Eligible Employees received a one-time lump sum cash payment.  Each of the payments is subject to clawback and repayment by the Eligible Employee in the event such officer or employee is terminated with cause or resigns without good reason before the one-year anniversary of the agreement. As we continue to work through our overall restructuring, it has determined that the retention bonus agreements were necessary to ensure we have the continued services of its management and key employees.  The aggregate amount of the retention bonus payments authorized by our Board of Directors totaled $1.7 million. For the three and six months ended June 30, 2017, a charge of $0.1 million was recognized as a component of Other, net in the unaudited condensed consolidated statements of operations. The balance of the retention bonus payments will be expensed ratably over the remaining service period.

Results of Operations
Non-GAAP Financial Information
Adjusted EBITDA, as presented in this Quarterly Report on Form 10-Q, is a supplemental measure of our performance that is not required by, or presented in accordance with, U.S. generally accepted accounting principles (U.S. GAAP). It is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income (loss) or any other performance measures derived in accordance with U.S. GAAP or as an alternative to cash flows from operating activities as measures of our liquidity.
We define Adjusted EBITDA as net income (loss) before deducting net interest expense, income taxes, depreciation, depletion and amortization, asset retirement obligation expenses, costs incurred evaluating strategic alternatives, non-cash production royalty to related party, asset impairment and restructuring charges, non-cash charge on settlement with Thoroughbred, loss on settlement of interest rate swap, loss on deferment of equity offering, non-cash stock compensation expense (income), non-cash employee benefit expense, and (gain) loss on extinguishment of debt. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers and analysts calculate Adjusted EBITDA in the same manner. We present Adjusted EBITDA because we consider it an important supplemental measure of our performance and believe it is useful to an investor in evaluating our Company. We also include a quantitative reconciliation of Adjusted EBITDA to the most directly comparable U.S. GAAP financial performance measure, which is net income (loss), in the sections that follow.

27

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Summary
 
Three Months Ended
June 30,
 
Change
 
2017
 
2016
 
Amount
 
Percentage
 
(In thousands, except per ton amounts)
Tons of coal sold
1,498

 
1,414

 
84

 
5.9
 %
Total revenue
$
60,904

 
$
60,309

 
$
595

 
1.0
 %
Average sales price per ton
$
40.67

 
$
42.65

 
$
(1.98
)
 
(4.6
)%
Cost of coal sales1
$
51,678

 
$
50,639

 
$
(1,039
)
 
(2.1
)%
Average cost of sales per ton1
$
34.51

 
$
35.81

 
$
1.30

 
3.6
 %
Net loss
$
(17,174
)
 
$
(15,002
)
 
$
(2,172
)
 
(14.5
)%
Adjusted EBITDA2
$
5,012

 
$
7,081

 
$
(2,069
)
 
(29.2
)%

1 
Includes revenue-based production taxes and royalties; excludes production royalty to related party, depreciation, depletion, and amortization, asset retirement obligation expenses, and general and administrative costs.
2 
Non-GAAP measure; please see definition above and reconciliation below.
Revenue
Our coal sales revenue for the three months ended June 30, 2017 increased by $0.6 million, or 1.0%, to $60.9 million, as compared to $60.3 million for the three months ended months ended June 30, 2016. This increase is attributable to a favorable volume variance of approximately $3.6 million year-over-year due to the timing of shipments, partially offset by an unfavorable price variance of approximately $3.0 million due to the renewal of sales contracts at less favorable prices.
Cost of Coal Sales
Cost of coal sales increased 2.1% to $51.7 million in the three months ended June 30, 2017, from $50.6 million in the same period of 2016. On a per ton basis, our cost of coal sales decreased during the three months ended June 30, 2017, compared to the same period of 2016, from $35.81 per ton to $34.51 per ton. This decrease in per ton amount is primarily due to the closure of our Parkway underground mine in October 2016, which was a higher cost operation, and improved operating efficiency at our underground mines from increased production due to higher demand for higher quality coal, partially offset by higher overall costs at our surface operations from mining in higher ratio reserves.
Production Royalty to Related Party
Production royalty to related party increased $0.2 million, or 10.5%, to $1.9 million during the three months ended June 30, 2017, as compared to the same period of 2016. This amount relates to production royalties earned by our affiliate, Thoroughbred, from sales originating from our Kronos underground mine (where the mineral reserves are leased directly from Thoroughbred). The increase is primarily due to an increase in sales volume experienced at our Kronos underground mine during the current quarter, partially offset by lower average sales prices in the current quarter, as compared to the same period of 2016, due to the renewal of sales contracts at less favorable prices. See Note 6, "Related-Party Transactions," to our unaudited condensed consolidated financial statements for further discussion related to Thoroughbred.
Depreciation, Depletion and Amortization
Depreciation, depletion, and amortization of $7.7 million during the three months ended June 30, 2017 was relatively consistent with the same period of 2016.
Asset Retirement Obligation Expenses
Asset retirement obligation expenses of $0.3 million in the three months ended June 30, 2017 was consistent with the same period of 2016.
Asset Impairment Charges
During the three months ended June 30, 2017 and 2016, we recognized non-cash impairment charges of $3.4 million and $3.4 million, respectively. The current year charge is related to the write-off of certain mine development costs associated with the cancellation of a mineral reserve lease in Union and Webster Counties, Kentucky, whereas the prior year charge is related to the write-off of certain previously paid advance royalties that could no longer be recouped upon the renewal of the aforementioned mineral reserve lease. See Note 9, "Mineral Reserve Lease," to the unaudited condensed consolidated financial statements for further discussion.

28

General and Administrative Expenses
General and administrative (G&A) expenses were $3.2 million for the three months ended June 30, 2017, which was $0.3 million, or 8.8%, higher than the three months ended June 30, 2016. The increase in the three months ended June 30, 2017, as compared to the same period of 2016, is due primarily to higher expenses for professional services ($0.1 million) and insurance costs ($0.1 million).
Interest Expense, Net
Interest expense, net is derived from the following components:
 
Three Months Ended June 30,
 
2017
 
2016
 
(In thousands)
11.75% Senior Secured Notes due 2019
$
5,875

 
$
5,875

Long-term obligation to related-party
2,668

 
1,767

Other, net
835

 
1,049

Capitalized interest
(128
)
 
(142
)
Total
$
9,250

 
$
8,549

Interest expense, net was $9.3 million for the three months ended June 30, 2017, as compared to $8.5 million for the three months ended June 30, 2016. The increase is principally attributable to higher related-party interest expense due to a higher effective interest rate, and a higher average balance on the long-term obligation to related-party.
Other, Net
Other, net for the three months ended June 30, 2017 was a charge of $0.9 million, as compared to $0.2 million for the three months ended June 30, 2016. The current year increase in expense is primarily due to higher costs incurred associated with evaluating strategic alternatives. For the three months ended June 30, 2017 and 2016, costs incurred evaluating strategic alternatives totaled $1.7 million and $0.5 million, respectively. Partially offsetting the increase in expense is the recognition in the three months ended June 30, 2017 of a gain on disposal of fixed assets of $0.7 million.
Net Loss
Net loss for the three months ended June 30, 2017 was $17.2 million, as compared to net loss of $15.0 million for the same period of 2016. The increase in net loss of $2.2 million is due to a decline in gross margin quarter over quarter, as well as an increase in interest expense and an increase of costs associated with evaluating strategic alternatives of $1.2 million in 2017, partially offset by the recognition of a gain on disposal of fixed assets of $0.7 million during the three months ended June 30, 2017, as compared to the same period of 2016.
Adjusted EBITDA
The following table reconciles Adjusted EBITDA to net loss, the most directly comparable U.S. GAAP measure:
 
Three Months Ended June 30,
 
2017
 
2016
 
(In thousands)
Net loss
$
(17,174
)
 
$
(15,002
)
Depreciation, depletion, and amortization
7,684

 
7,544

Asset retirement obligation expenses
341

 
340

Non-cash production royalty to related party
—

 
1,711

Interest expense, net
9,250

 
8,549

Income tax benefit
(237
)
 
—

Asset impairment charges
3,382

 
3,381

Costs incurred evaluating strategic alternatives
1,675

 
451

Non-cash employee benefit expense
88

 
104

Non-cash stock compensation expense
3

 
3

Adjusted EBITDA
$
5,012

 
$
7,081


29

Our Adjusted EBITDA for the three months ended June 30, 2017 and 2016 was $5.0 million and $7.1 million, respectively. The decrease resulted primarily from the inclusion in Adjusted EBITDA of the cash portion of production royalties paid to Thoroughbred of $1.9 million, which began January 1, 2017, pursuant to existing lease terms and the Settlement Agreement, as well as a decline in gross margin and increase in G&A expenses during the three months ended June 30, 2017, partially offset by the recognition of a gain on disposal of fixed assets in the second quarter of 2017.
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Summary
 
Six Months Ended
June 30,
 
Change
 
2017
 
2016
 
Amount
 
Percentage
 
(In thousands, except per ton amounts)
Tons of coal sold
2,969

 
2,838

 
131

 
4.6
 %
Total revenue
$
120,011

 
$
120,753

 
$
(742
)
 
(0.6
)%
Average sales price per ton
$
40.43

 
$
42.55

 
$
(2.12
)
 
(5.0
)%
Cost of coal sales1
$
102,974

 
$
103,314

 
$
340

 
0.3
 %
Average cost of sales per ton1
$
34.69

 
$
36.40

 
$
1.71

 
4.7
 %
Net loss
$
(32,620
)
 
$
(28,443
)
 
$
(4,177
)
 
(14.7
)%
Adjusted EBITDA2
$
8,119

 
$
11,514

 
$
(3,395
)
 
(29.5
)%

1 
Includes revenue-based production taxes and royalties; excludes production royalty to related party, depreciation, depletion, and amortization, asset retirement obligation expenses, and general and administrative costs.
2 
Non-GAAP measure; please see definition above and reconciliation below.
Revenue
Our coal sales revenue for the six months ended June 30, 2017 decreased by 0.7 million, or 0.6% , to $120.0 million, as compared to $120.8 million for the six months ended months ended June 30, 2016. This decrease is attributable to an unfavorable price variance of approximately $6.3 million due to the renewal of sales contracts at less favorable prices, as well as customer mix, as compared to the six months ended June 30, 2016. Partially offsetting this decrease was a favorable volume variance of approximately $5.6 million year-over-year due to timing of shipments.
Cost of Coal Sales
Cost of coal sales decreased 0.3% to $103.0 million in the six months ended June 30, 2017, from $103.3 million in the same period of 2016. On a per ton basis, our cost of coal sales decreased during the six months ended June 30, 2017, compared to the same period of 2016, from $36.40 per ton to $34.69 per ton. This decrease in per ton amount is primarily due to the closure of our Parkway underground mine in October 2016, which was a higher cost operation, and improved operating efficiency at our underground mines from increased production due to higher demand for higher quality coal, partially offset by higher overall costs at our surface operations from mining in higher ratio reserves.
Production Royalty to Related Party
Production royalty to related party increased $0.4 million, or 12.3%, to $3.8 million during the six months ended June 30, 2017, as compared to the same period of 2016. This amount relates to production royalties earned by our affiliate, Thoroughbred, from sales originating from our Kronos underground mine (where the mineral reserves are leased directly from Thoroughbred). The increase is primarily due to an increase in sales volume experienced at our Kronos underground mine during the current period, partially offset by lower average sales prices in the current period, as compared to the same period of 2016, due to the renewal of sales contracts at less favorable prices. See Note 6, "Related-Party Transactions," to our unaudited condensed consolidated financial statements for further discussion related to Thoroughbred.
Depreciation, Depletion and Amortization
Depreciation, depletion, and amortization of $15.3 million during the six months ended June 30, 2017 was relatively consistent with the same period of 2016.
Asset Retirement Obligation Expenses
Asset retirement obligation expenses of $0.7 million in the six months ended June 30, 2017 was consistent with the same period of 2016.

30

Asset Impairment Charges
During the six months ended June 30, 2017 and 2016, we recognized non-cash impairment charges of $3.4 million and $3.4 million, respectively. The current year charge is related to the write-off of certain mine development costs associated with the cancellation of a mineral reserve lease in Union and Webster Counties, Kentucky, whereas the prior year charge is related to the write-off of certain previously paid advance royalties that could no longer be recouped upon the renewal of the aforementioned mineral reserve lease. See Note 9, "Mineral Reserve Lease," to the unaudited condensed consolidated financial statements for further discussion.
General and Administrative Expenses
G&A expenses were $6.1 million for the six months ended June 30, 2017, which was $0.3 million, or 4.7%, lower than the six months ended June 30, 2016. The decrease in the six months ended June 30, 2017, as compared to the same period of 2016, is due primarily to lower expenses for labor and benefits of $0.5 million.
Interest Expense, Net
Interest expense, net is derived from the following components:
 
Six Months Ended June 30,
 
2017
 
2016
 
(In thousands)
11.75% Senior Secured Notes due 2019
$
11,750

 
$
11,750

Long-term obligation to related party
5,295

 
3,354

Other, net
1,674

 
1,896

Capitalized interest
(275
)
 
(343
)
Total
$
18,444

 
$
16,657

 
 
 
 
Interest expense, net was $18.4 million for the six months ended June 30, 2017, as compared to $16.7 million for the six months ended months ended June 30, 2016. The increase is principally attributable to higher related party interest expense due to a higher effective interest rate, and a higher average balance on the long-term obligation to related party.
Other, Net
Other, net for the six months ended June 30, 2017 was a charge of $2.2 million, as compared to $0.1 million for the six months ended months ended June 30, 2016. The current year increase in expense is primarily due to higher costs incurred associated with evaluating strategic alternatives. For the six months ended June 30, 2017 and 2016, costs incurred evaluating strategic alternatives totaled $3.0 million and $0.5 million, respectively. Partially offsetting the increase in expense is the recognition in the three months ended June 30, 2017 of a gain on disposal of fixed assets of $0.7 million.
Net Loss
Net loss for the six months ended June 30, 2017 was $32.6 million, as compared to net loss of $28.4 million for the same period of 2016. The increase in net loss of $4.2 million is due to a decline in gross margin year-over-year, as well as an increase in interest expense and additional costs associated with evaluating strategic alternatives of $2.5 million in 2017, partially offset by lower G&A expenses and the recognition of a gain on disposal of fixed assets during the six months ended June 30, 2017, as compared to the same period of 2016.
Adjusted EBITDA
The following table reconciles Adjusted EBITDA to net loss, the most directly comparable U.S. GAAP measure:

31

 
Six Months Ended June 30,
 
2017
 
2016
 
(In thousands)
Net loss
$
(32,620
)
 
$
(28,443
)
Depreciation, depletion, and amortization
15,320

 
15,158

Asset retirement obligation expenses
670

 
669

Non-cash production royalty to related party
—

 
3,340

Interest expense, net
18,444

 
16,657

Income tax (benefit) provision
(237
)
 
117

Asset impairment charges
3,382

 
3,381

Costs incurred evaluating strategic alternatives
2,978

 
451

Non-cash employee benefit expense
176

 
209

Non-cash stock compensation expense (income)
6

 
(25
)
Adjusted EBITDA
$
8,119

 
$
11,514

Our Adjusted EBITDA for the six months ended June 30, 2017 and 2016 was $8.1 million and $11.5 million, respectively. The decrease resulted primarily from the inclusion in Adjusted EBITDA of the cash portion of production royalties paid to Thoroughbred of $3.8 million, which began January 1, 2017, pursuant to existing lease terms and the Settlement Agreement, as well as lower gross margins in the current period, partially offset by lower G&A expenses and the recognition of a gain on disposal of fixed assets.

Liquidity and Capital Resources
Liquidity
The principal indicator of our liquidity since the termination of our former asset-based credit facility in November 2016 is cash on-hand, which, as of June 30, 2017, was $43.3 million.
Our business is capital intensive and requires substantial capital expenditures for purchasing, upgrading and maintaining equipment used in mining our reserves, as well as complying with applicable environmental laws and regulations. Our principal liquidity requirements are to finance current operations; fund capital expenditures, including acquisitions from time to time; satisfy reclamation obligations; and service our debt. Historically, our primary sources of liquidity to meet these needs have been cash generated by our operations, and to a lesser extent, borrowings under our credit facilities and contributions from our equity holders.
We manage our exposure to changing commodity prices for our long-term coal contract portfolio through the use of multi-year coal supply agreements. We generally enter into fixed price, fixed volume supply contracts with terms greater than one year with customers with whom we have historically had limited collection issues. Our ability to satisfy debt service obligations, fund planned capital expenditures, and make acquisitions will depend upon our future operating performance, which will be affected by prevailing economic conditions in the coal industry and financial, business and other factors, some of which are beyond our control.
We have experienced recurring losses from operations, which has led to a substantial decline in cash flows from operating activities. Our current operating plan indicates that we will continue to incur losses from operations and generate negative cash flows from operating activities. In addition, we entered into the Settlement Agreement with our affiliate, Thoroughbred, effective March 29, 2017, whereby we agreed, among other things, to begin paying Thoroughbred all production royalties earned on or after January 1, 2017 in cash, as permitted by the existing lease terms (see Note 6, "Related-Party Transactions," to our unaudited consolidated financial statements for more information with respect to the Settlement Agreement).
Furthermore, the Company is currently in default pursuant to the terms of the Indenture governing the Notes as a result of failing to make the $11.75 million interest payment due on the Notes on June 15, 2017. On July 16, 2017, the Company entered into the Forbearance Agreement with Holders, whereby the Holders have agreed to forbear from exercising their rights and remedies under the Indenture or the related security documents through the Forbearance Period with respect to the default as a result of the Company’s failure to make the June 15, 2017 interest payment. See “Going Concern” for additional information.

32

We also have other debt obligations entered into to finance the acquisition of certain equipment and land. Certain of these financing agreements include cross-default or cross-event of default provisions. As a result of our default under the Indenture, the lenders that are party to certain of these agreements could elect to declare some or all of the amounts outstanding as immediately due and payable.
The Company’s continuing operating losses, negative cash flow projections, Indenture default and other liquidity risks raise substantial doubt about whether the Company will meet its obligations as they become due over the next year. As a result of this, as well as the continued uncertainty around future coal fundamentals, the Company has concluded there exists substantial doubt regarding its ability to continue as a going concern.
Due to our current financial outlook, we have undertaken steps to preserve our liquidity and manage operating costs, including controlling capital expenditures. Beginning in 2015, we undertook steps to enhance our financial flexibility and reduce cash outflows in the near term, including a streamlining of our cost structure and anticipated reductions in production volumes and capital expenditures. In addition, we have engaged financial and legal advisers to assist in restructuring our capital and evaluating other potential alternatives to address the impending liquidity constraints. With the assistance of our advisers, we are actively negotiating the terms of a restructuring with the Holders of the Notes with the objective of reaching an agreement by the end of the Forbearance Period. Until any definitive agreements are negotiated in their entirety and executed, and the transactions contemplated thereby are consummated, there can be no assurance that any restructuring transaction will be completed by the end of the Forbearance Period or at all. Furthermore, it may be difficult to come to an agreement that is acceptable to all of our creditors, and there can be no assurance that any restructuring will be possible at all. Failure to reach an agreement on the terms of a restructuring with our creditors, including the Holders, would have a material adverse effect on our liquidity, financial condition and results of operations. It may be necessary for us to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring, or our creditors could force us into an involuntary bankruptcy or liquidation.
Cash Flows
The following table reflects cash flows for the applicable periods:
 
Six Months Ended June 30,
 
2017
 
2016
 
(In thousands)
Net cash used in:
 
 
 
Operating activities
$
(4,798
)
 
$
(7,919
)
Investing activities
$
(3,833
)
 
$
(1,593
)
Financing activities
$
(5,613
)
 
$
(5,213
)

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Net cash used in operating activities was $4.8 million for the six months ended June 30, 2017, a decrease of $3.1 million from net cash used in operating activities of $7.9 million for the same period of 2016. Operating results were negatively impacted during the first six months of 2017 due to an increase in interest expense and incurring costs of $3.0 million associated with evaluating certain strategic alternatives. In addition, operating cash flows were negatively impacted in the current period from commencing the payment of production royalties in cash to Thoroughbred as of January 1, 2017 pursuant to the Settlement Agreement. Positively impacting cash flows from operations was an increase in non-cash interest expense due to the deferral of the interest payment on the Notes due June 15, 2017. Cash flows from operations for the six months ended June 30, 2016 were positively impacted by an increase in the net related party liabilities of $6.5 million due to the deferment of amounts owed to our affiliate, Thoroughbred, including interest and royalties earned on leased reserves, and a decrease in inventory due to the timing of shipments. Negatively impacting operating cash flows in the comparable period of the prior year was a decrease in accounts payable and accrued and other liabilities due to the timing of payments.
Net cash used in investing activities increased $2.2 million to $3.8 million for the six months ended June 30, 2017, as compared to $1.6 million for the same period of 2016. The current and prior year investments are primarily attributable to capital expenditures to maintain our existing fixed assets, partially offset by proceeds received from the disposal of certain fixed assets of $1.5 million during the current year period.

33

Net cash used in financing activities was $5.6 million for the six months ended June 30, 2017, as compared to net cash used in financing activities of $5.2 million for the six months ended June 30, 2016. The current and prior year activity relates primarily to scheduled capital lease and other long-term debt payments.
Contractual Obligations
Our contractual obligations have not changed materially from the disclosures in our Annual Report on Form 10-K filed with the SEC on March 31, 2017.
Capital Expenditures
Our mining operations require investments to expand, upgrade or enhance existing operations and to comply with environmental and safety regulations. In response to the challenging coal environment, we have sought to maintain a controlled, disciplined approach to capital spending in order to preserve liquidity. Our anticipated total capital expenditures for 2017 are estimated to be within a range of $12.0 million to $14.0 million. Management anticipates funding capital requirements with current cash balances and cash flows provided by operations. With respect to any significant development projects, we plan to defer them to time periods beyond 2017 and will continue to evaluate the timing associated with those projects based on changes in overall coal supply and demand.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include guarantees and financial instruments with off-balance sheet risk, such as surety bonds. No liabilities related to these arrangements are reflected in our consolidated balance sheet.
Federal and state laws require us to secure certain long-term obligations such as mine closure and reclamation costs and other obligations. We typically secure these obligations by using surety bonds, an off-balance sheet instrument. The use of surety bonds is less expensive for us than the alternative of posting a 100% cash bond. To the extent that surety bonds become unavailable, we would seek to secure our reclamation obligations with letters of credit, cash deposits or other suitable forms of collateral.
As of June 30, 2017, we had approximately $33.3 million in surety bonds outstanding to secure the performance of our reclamation obligations, which were supported by approximately $6.0 million of cash posted as collateral.

Related-Party Transactions
In the normal course of business, we engage in certain related-party transactions with Thoroughbred, as well as other affiliated parties. These transactions generally include production and overriding royalties, administrative service agreements, reserve leases, and certain financing arrangements. For more information regarding our related party transactions, see Note 6, “Related-Party Transactions,” to our unaudited condensed consolidated financial statements included in this report and “Item 13—Certain Relationships and Related-Party Transactions, and Director Independence” in our Annual Report on Form 10-K filed with the SEC on March 31, 2017.

Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
The most significant areas requiring the use of management estimates and assumptions relate to units-of-production amortization calculations, asset retirement obligations, useful lives for depreciation of fixed assets, impairment of long-lived assets, and the accounting for the long-term obligation to related-party. For a full discussion of our accounting estimates and assumptions that we have identified as critical in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K filed with the SEC on March 31, 2017.


34

Recent Accounting Pronouncements

See Note 1, "Description of Business and Entity Structure," to our unaudited condensed consolidated financial statements included in this report for a discussion of newly adopted accounting standards and accounting standards not yet implemented.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
We define market risk as the risk of economic loss as a consequence of the adverse movement of market rates and prices. We believe our principal market risks are commodity price risk and credit risk.
Commodity Price Risk
We sell most of the coal we produce under multi-year coal supply agreements. Historically, we have principally managed the commodity price risks from our coal sales by entering into multi-year coal supply agreements of varying terms and durations, rather than through the use of derivative instruments.
Some of the products used in our mining activities, such as diesel fuel, explosives and steel products for roof support used in our underground mining, are subject to price volatility. Through our suppliers, we utilize forward purchases to manage a portion of our exposure related to diesel fuel volatility. A hypothetical increase of $0.10 per gallon for diesel fuel would have negatively impacted our results of operations by $0.1 million and $0.2 million for the three and six months ended June 30, 2017, respectively. A hypothetical increase of 10% in steel prices would have negatively impacted our results of operations by $0.4 million and $0.8 million for the three and six months ended June 30, 2017, respectively. A hypothetical increase of 10% in explosives prices would have negatively impacted our results of operations by $0.1 million and $0.3 million for the three and six months ended June 30, 2017, respectively.
Credit Risk
Most of our coal sales are made to electric utilities. Therefore, our credit risk is primarily with domestic electric power generators. Our policy is to independently evaluate each customer’s creditworthiness prior to entering into a transaction with the customer and to constantly monitor outstanding accounts receivable against established credit limits. When deemed appropriate, we will take steps to reduce credit exposure to customers that do not meet our credit standards or whose credit has deteriorated. Credit losses are provided for in the financial statements and have historically been minimal.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, reviewed and evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2017. Based upon such review and evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the second quarter of 2017, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

35

PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are involved from time to time in various lawsuits and claims arising in the ordinary course of business. Although the outcomes of these lawsuits and claims are uncertain, we do not believe any of them will have a material adverse effect on our business, financial condition or results of operations. See Note 13, "Commitments and Contingencies," to our unaudited condensed consolidated financial statements included in this report for a discussion of significant legal matters.

Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” sections in the Annual Report on Form 10-K for the year ended December 31, 2014, together with the cautionary statement under the caption “Cautionary Statement Regarding Forward-Looking Statements” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report. Except as set forth below, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K filed with the SEC on March 31, 2017.
We have concluded there is substantial doubt about our ability to continue as a going concern and our independent registered public accounting firm's report on our financial statements contains an explanatory paragraph describing our ability to continue as a going concern.
Our ability to continue as a going concern is an issue raised as a result of recurring losses from operations, our accumulated deficit, and the anticipation of limited liquidity to meet our obligations through March 2018. Effective November 14, 2016, we terminated our asset-based revolving credit facility entered into in December 2012 due to restrictions in our borrowing capacity, which were anticipated to continue through the remaining term of the agreement. In addition, we entered into the Settlement Agreement with Thoroughbred, effective March 29, 2017, whereby we agreed, among other things, to begin paying Thoroughbred all production royalties earned on or after January 1, 2017 in cash (see Note 6, "Related-Party Transactions"). Furthermore, the Company is currently in default under the terms of the Indenture governing the Notes as a result of failing to make the $11.75 million interest payment due on the Notes on June 15, 2017. On July 16, 2017, the Company entered into the Forbearance Agreement with Holders, whereby the Holders have agreed to forbear from exercising their rights and remedies under the Indenture or the related security documents through the Forbearance Period with respect to the default as a result of the Company’s failure to make the June 15, 2017 interest payment. See Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Going Concern” for additional information.
We also have other debt obligations entered into to finance the acquisition of certain equipment and land. Certain of these financing agreements include cross-default or cross-event of default provisions. As a result of our default under the Indenture, the lenders that are party to certain of these agreements could elect to declare some or all of the amounts outstanding as immediately due and payable.
The Company’s continuing operating losses, negative cash flow projections, Indenture default and other liquidity risks raise substantial doubt about whether the Company will meet its obligations as they become due over the next year. As a result of this, as well as the continued uncertainty around future coal fundamentals, the Company has concluded there exists substantial doubt regarding its ability to continue as a going concern. Our ability to continue as a going concern is subject to our ability to restructure our balance sheet, which could include seeking additional financing. Further, external perceptions regarding our ability to continue as a going concern and our continued net operating losses increase the difficulty of achieving such actions, and there can be no assurances that such measures will prove successful.
We have engaged financial and legal advisers to assist us in restructuring our capital structure and evaluating other potential alternatives to address the impending liquidity constraints. With the assistance of our advisers, we are actively negotiating the terms of a restructuring with the Holders of the Notes with the objective of reaching an agreement by the end of the Forbearance Period. Until any definitive agreements are negotiated in their entirety and executed, and the transactions contemplated thereby are consummated, there can be no assurance that any restructuring transaction will be completed by the end of the Forbearance Period or at all. Furthermore, it may be difficult to come to an agreement that is acceptable to all of our creditors, and there can be no assurance that any restructuring will be possible at all. Failure to reach an agreement on the terms of a restructuring with our creditors, including the Holders, would have a material adverse effect on our liquidity, financial condition and results of operations. It may be necessary for us to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring, or our creditors could force us into an involuntary bankruptcy or liquidation.

36

Additionally, our auditors included an explanatory paragraph to their audit opinion relating to our consolidated financial statements for the fiscal year ended December 31, 2016 regarding the substantial doubt about our ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements have been prepared assuming that we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay amounts due under our indebtedness.
Our ability to make scheduled payments of principal or interest on our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt. As of June 30, 2017, our total consolidated indebtedness was approximately $203.5 million, consisting primarily of the Notes. As of June 30, 2017, we had cash on hand of approximately $43.3 million.
We are actively negotiating with the Holders the terms of a restructuring with the objective of reaching agreement by the end of the Forbearance Period. Until any definitive agreements are negotiated in their entirety and executed, and the transactions contemplated thereby are consummated, there can be no assurance that any restructuring transaction will be completed by the end of the Forbearance Period or at all. If we are unable to successfully negotiate and complete a restructuring of the Notes by the end of the Forbearance Period, or if we fail to otherwise comply with the terms of the Forbearance Agreement, the Forbearance Period will terminate, and the Holders may accelerate 100% of the principal and interest due on the Notes, which would be due and payable immediately.
We also have other debt obligations entered into to finance the acquisition of certain equipment and land. Certain of these financing agreements include cross-default or cross-event of default provisions. As a result of our default under the Indenture, the lenders that are party to certain of these agreements could elect to declare some or all of the amounts outstanding as immediately due and payable.
If we are unable to satisfy our continuing debt obligations, or our lenders or Holders of the Notes declare amounts due as immediately due and payable as a result of the Indenture default, we may have to file a voluntary petition for relief under Chapter 11 in order to pursue and implement a restructuring of our business and capital structure, or our creditors could force us into an involuntary bankruptcy or liquidation.
We may seek the protection of the United States Bankruptcy Court (the Bankruptcy Court), which may harm our business and adversely affect our ability to retain key personnel.
We have engaged financial and legal advisors to assist us in, among other things, analyzing various strategic alternatives to address our liquidity and capital structure. However, as discussed herein, a filing under Chapter 11 may be unavoidable. Seeking Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as the process related to a Chapter 11 proceeding continues, our senior management would be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations. Bankruptcy Court protection also might make it more difficult to retain management and other key personnel necessary to the success and growth of our business. In addition, the longer a Chapter 11 proceeding continues, the more likely it is that our customers would lose confidence in our ability to reorganize our businesses successfully and would seek to establish alternative commercial relationships.
Item 3. Defaults upon Senior Securities
On June 15, 2017, a scheduled interest payment of $11.75 million was due on the Company’s outstanding Notes. On June 15, 2017, the Company exercised its right under the Indenture governing the Notes to enter into a 30-day grace period to defer the interest payment on the Notes. The Company did not make the June 15, 2017 interest payment within the 30-day grace period, and as such, an event of default occurred pursuant to the terms of the Indenture. Upon an event of default, the Trustee or the holders of at least 25% in aggregate principal amount of the Notes then outstanding may declare the principal of and accrued interest on the Notes to be immediately due and payable.
On July 16, 2017, Armstrong and certain of our subsidiaries entered into the Forbearance Agreement with the Holders of approximately $158 million in aggregate principal amount (representing approximately 79% of the outstanding principal amount) of the Company’s outstanding Notes issued pursuant to the Indenture. Pursuant to the Forbearance Agreement, the Holders have agreed to forbear from exercising their rights and remedies under the Indenture or the related security documents

37

as a result of the event of default due to the Company’s failure to make the $11.75 million June 15, 2017 interest payment on the Notes until the expiration of the Forbearance Period. The Holders have also agreed to not transfer any ownership in the Notes held by any of the Holders during the Forbearance Period other than to potential transferees currently parties to or who agree in writing to be bound by the Forbearance Agreement. With the assistance of our advisers, we are actively negotiating the terms of a restructuring with the Holders of the Notes with the objective of reaching an agreement by the end of the Forbearance Period. Until any definitive agreements are negotiated in their entirety and executed, and the transactions contemplated thereby are consummated, there can be no assurance that any restructuring transaction will be completed by the end of the Forbearance Period or at all. As of the date of filing this report, the total amount due and payable on the Notes, including principal and accrued interest, is $215.5 million.
The Company also has other debt obligations entered into to finance the acquisition of certain equipment and land. Certain of these financing agreements include cross-default or cross-event of default provisions. As a result of the Company’s default under the Indenture, the lenders that are party to certain of these agreements could elect to declare some or all of the amounts outstanding as immediately due and payable.

Item 4. Mine Safety Disclosures
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item  104 of Regulation S-K is included in Exhibit 95.1 to this Quarterly Report on Form 10-Q.

Item 5. Other Information
(a) None
(b) On June 7, 2017, the Company held a Special Meeting of Shareholders (the Special Meeting) at which the Company’s shareholders approved the adoption of the Company’s Amended and Restated Certificate of Incorporation and adopted the Second Amended and Restated Bylaws. Prior to approval and adoption of these documents, the Company’s Amended and Restated Bylaws provided that shareholders could nominate an individual for director by providing notice, which was required to include the name of the nominee, at any time before the annual meeting. As approved and adopted at the Special Meeting, the Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws at the Special Meeting no longer contain director nomination requirements. The amended documents now provide that any action that may be taken at an annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, upon the written consent of the holders of the outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting. Furthermore, the amended documents provide that the total number of directors constituting the board of directors can be fixed by the board of directors or by the holders of a majority of the voting power of the outstanding stock of the Company. Any vacancy on the board for any reason can be filled by a vote of the majority of directors then in office or the holders of a majority of the voting power of the outstanding shares of the Company’s stock.

38

Item 6. Exhibits
 
 
Incorporated by Reference
 
Filed or
Furnished
Herewith
Exhibit
Number
Description
 
Form
 
File Number
 
Exhibit
 
Filing
Date
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1
Amended and Restated Certificate of Incorporation of Armstrong Energy, Inc., effective as of June 7, 2017.
 
8-K
 
333-191182
 
3.1
 
6/7/2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2
Second Amended and Restated Bylaws of Armstrong Energy, Inc., effective as of June 7, 2017.
 
8-K
 
333-191182
 
3.3
 
6/7/2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1
Forbearance Agreement, dated as of July 16, 2017, by and among Armstrong Energy, Inc., the guarantors named therein and certain holders of the 11.75% Senior Secured Notes due 2019.
 
8-K
 
333-191182
 
10.1
 
7/17/2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.2
Form of Retention Bonus Agreement.
 
8-K
 
333-191182
 
10.1
 
6/12/2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.3†
Retention Bonus Agreement, dated June 12, 2017, by and between Armstrong Energy, Inc. and Martin D. Wilson.
 
8-K
 
333-191182
 
10.2
 
6/12/2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4†
Retention Bonus Agreement, dated June 12, 2017, by and between Armstrong Energy, Inc. and J. Hord Armstrong III.
 
8-K
 
333-191182
 
10.3
 
6/12/2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.5†
Retention Bonus Agreement, dated June 12, 2017, by and between Armstrong Energy, Inc. and Jeffrey F. Winnick.
 
8-K
 
333-191182
 
10.4
 
6/12/2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
32.1#
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
32.2#
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
95.1
Federal Mine Safety and Health Act Information.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
XBRL Instance Document
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
101.SCH
XBRL Taxonomy Extension Scheme Document
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
 
 
X
†
Indicates a management contract or compensatory plan or arrangement.
#
This certification is deemed not “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.


39

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ARMSTRONG ENERGY, INC.
 
 
 
 
Date: August 11, 2017
 
By:
 
/s/ Jeffrey F. Winnick
 
 
 
 
Jeffrey F. Winnick
 
 
 
 
Vice President and Chief Financial Officer
 
 
 
 
(On behalf of the registrant and as Principal  Financial Officer)


40

Armstrong Energy, Inc. Reports