EastCoal Inc. (TSX VENTURE:ECX)(AIM:ECX) ("EastCoal" or the "Company") announces
its unaudited interim condensed consolidated financial statements for the three
and six months ended June 30, 2013. These are provided in two sections below:
1. Management Discussion and Analysis of East Coal; and
2. Unaudited interim condensed consolidated financial statements for
the three and six months ended June 30, 2013.
A copy of the above can be found on the Company's website: www.eastcoal.ca.
About EastCoal Inc.
Neither the TSX Venture Exchange nor its Regulation Services Provider (as that
term is defined in the policies of the TSX Venture Exchange) accepts
responsibility for the adequacy or accuracy of this release.
This press release contains projections and forward-looking information that
involve various risks and uncertainties regarding future events. Such
forward-looking information can include without limitation statements based on
current expectations involving a number of risks and uncertainties and are not
guarantees of future performance. There are numerous risks and uncertainties
that could cause actual results to differ materially from those expressed in the
forward looking information. These and all subsequent written and oral
forward-looking information are based on estimates and opinions on the dates
they are made and are expressly qualified in their entirety by this notice.
Except as required by law, the Company assumes no obligation to update
forward-looking information should circumstances or management's estimates or
opinions change.
Management Discussion and Analysis
For the Three and Six Months Ended June 30, 2013
This Management Discussion and Analysis ("MD&A") of EastCoal Inc. (the "Company"
or "EastCoal") provides analysis of the Company's financial results for the
three and six months ended June 30, 2013 and should be read in conjunction with
the accompanying unaudited interim condensed consolidated financial statements
and notes thereto for the three and six months ended June 30, 2013 ("Financial
Statements") and the Company's Annual Information Form ("AIF") all of which are
available on SEDAR at www.sedar.com. The MD&A is current as at August 29, 2013,
the date of preparation.
The June 30, 2013 financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") applicable to the
preparation of interim financial statements. All amounts are expressed in
Canadian dollars, unless otherwise stated.
Certain statements made may constitute forward-looking statements. Such
statements involve a number of known and unknown risks, uncertainties and other
factors. Actual results, performance and achievements may be materially
different from those expressed or implied by these forward-looking statements.
1 Highlights
-- Loss of $1,233,134 for continued operations during the three months
ended June 30, 2013 (2012: $101,466). Loss from discontinued operations
during the same period of $18,365,659 mainly resulting from further
impairment of and accounting adjustments for the Menzhinsky operation.
These losses do not have any cash impact on the Company.
-- Loss per share of $0.02 for the three month period ended June 30, 2013
(2012: $0.00), excluding losses from discontinued operations.
-- The insolvency application process for Inter-Invest LLC ("Inter-Invest")
is ongoing and it is expected that Inter-Invest will formally enter
liquidation in September 2013. Upon entering liquidation, it is expected
that the liabilities of Inter-Invest included in the consolidated
accounts totaling $18,774,000 will no longer be recognized in the
Company's financial statements resulting in a one-off gain for
accounting purposes equal to the amount of these consolidated
liabilities.
-- On June 7, 2013 the Company completed a private placement of 385,000,000
shares on a pre-consolidation basis for gross proceeds of $7,700,000;
-- Production at the Company's Verticalnaya North Project ("VNP") commenced
in late July 2013. The Company is now planning to ramp up production to
an initial 4,000 tonnes per month and then to 11,000 tonnes per month in
Q4 2013 by applying conventional mining methods and locally manufactured
equipment. The delay in ramp up to the 11,000 tonne per month level is
due to the employment of mining staff taking longer than expected but
this process is now well underway.
-- The Company is in the process of preparing an updated technical report
in compliance with the requirements of National Instrument 43-101
("NI43-101") for its Verticalnaya property, which it expects to file
shortly. Subject to the filing of the updated 43-101, the Company will
proceed with its rights offering to existing shareholders, though there
can be no certainty on the outcome of the rights offer. If unsuccessful
the Company will have to pursue alternative sources of funding.
-- On August 8, 2013 the Company consolidated its shares on a ratio of ten
(10) pre-consolidation common shares to one (1) post-consolidation
common share, consolidating the Company's 728,048,493 then issued and
outstanding common shares to 72,804,849 common shares following the
consolidation (the "Consolidation").
2 Business Overview
EastCoal Inc. is quoted on the TSX Venture Exchange ("TSX-V" or the "Exchange")
and traded on AIM under the symbol "ECX". The Company has one major asset, the
Verticalnaya Mining Complex ("Verticalnaya") in South Eastern Ukraine.
Verticalnaya comprises two operations; the existing H8 Deep Mine ("Verticalnaya
Mine") and the Verticalnaya North Project ("VNP"), a newly developed incline
mine just north of the Verticalnaya Mine. In October 2010, following a period of
planning, permitting, and detailed improvements, the Company commenced
construction of the VNP as a source of early coal production. To date, 2.7
kilometers of drift development has been completed at VNP. These drifts access
the shallower H11 and H11B coal seams.
Production from VNP commenced in July, 2013. Target production from the both the
Verticalnaya Mine and the VNP is circa 2.5 million tonnes per annum ("Mtpa") in
aggregate of high quality anthracite for domestic and export markets.
In 2011, the Company, after commencing to de-water the lower levels of the
Verticalnaya Mine, began rehabilitating previously flooded roadways. The
roadways are generally in good condition, requiring only minor repair in some
sections. As the water level is lowered, the Company will re-establish a
ventilation circuit and repair the current conveyor route that will eventually
transport coal by high-speed conveyor from the deep H8 seam to surface.
From the outset, the Company has required the introduction and maintenance of
safety procedures in line with best global industry practice. International
safety consultants have visited Ukraine operations and their recommendations
have been and are being implemented. Safety standards are being received
favorably by the workforce. Verticalnaya Mine and VNP are categorized as
non-gassy, with low explosive risk.
As previously disclosed, on May 22, 2013 the Board resolved to place
Inter-Invest LLC ("Inter-Invest"), the wholly owned subsidiary that owns the
Menzhinsky operations into liquidation. The insolvency application process is
ongoing and it is expected that Inter-Invest will formally enter liquidation in
September 2013.
2.1 The vision
The Company's vision is to become a leading producer of high quality coal in
Ukraine.
The Company, deploying a strong and experienced team to develop value from
Verticalnaya, is the leader of western investment into the Donbass coal basin -
an area which has been identified as having tremendous potential.
2.2 Verticalnaya
2.2.1 Introduction
Verticalnaya comprises two operations, the Verticalnaya Mine accessing the lower
level H8 seam and VNP, an incline mine in development accessing the upper level
H11 and H11B seams.
At VNP, the Company has completed the portals and in excess of 2,700 meters of
drift and roadway development and commenced the drivage of the two surface
drifts to access the H11 and H11B seams where first coal production commenced in
July 2013.
The Company is in the process of preparing an updated technical report in
compliance with the requirements of National Instrument 43-101 ("NI43-101") for
its Verticalnaya property (the "Updated Report"). This report will be made
available on SEDAR at www.sedar.com and the Company's website at www.eastcoal.ca
in due course.
The Company filed the "Amended Pre-Feasibility Study Report on the Verticalnaya
Mine, Ukraine" by IMC Group Consulting Ltd. ("IMC"), dated June 2012 (the
"Previous Report") on July 9, 2012. As part of the Company's admission to
trading on the AIM market of the London Stock Exchange plc and in accordance
with the AIM rules, the Company filed a Competent Persons Report (the "CPR").
The CPR discloses a 26% increase (from the Previous Report) in JORC-compliant
total resources (inclusive of reserves), and an amended economic analysis, with
a downgrade of some reserves from proved to probable class. The financial
evaluation included inter alia a lower assumed sales price for coal, resulting
in a reduction in net present value.
Since the Company disclosed amended estimates and analysis in the CPR and in
investor materials, for NI43-101 purposes the Previous Report is no longer
current and the aggregate changes are material changes in relation to the
Company which have triggered a requirement to file an updated technical report
in compliance with the requirements of NI43-101.
The Company has retained IMC who are in the process of preparing and filing the
Updated Report which should be available in due course. Because of the material
changes in relation to the Company detailed in the CPR which have required an
update to the Previous Report, investors and shareholders should not place undue
reliance on the Previous Report.
Upon publication of the Updated Report, the Company will re-file this MD&A, the
MD&A for the three months ended June 30, 2013 and also re-file its Annual
Information Form for the year ended December 31, 2012 on SEDAR to reflect the
changes to the Company's technical disclosure set out in the Updated Report.
2.2.2 Location
Verticalnaya is located in the Donbass region. A number of settlements lie in
the vicinity including the towns of Lunacharsk, Leninskiy, Volodarsk, Ustinovka
and the villages of Malomedvezhje and Fedorovka; the latter is located only 1.5
kilometers from the mine.
EastCoal has been issued a mining license which allows the Company to extract
coal from seams H11, H11B, H10B, H8 and H8B within the license area. This
license is valid for 20 years from the date of issue and expires on July 19,
2027.
EastCoal leases a land area totaling 23.73 Ha on which the main mine and process
facilities, rail and road infrastructure and waste storage areas are located.
The site leased for the VNP mine access and surface facilities occupies a
slightly elevated position approximately 1.5 kilometers north-west of the main
Verticalnaya Mine site.
2.2.3 Infrastructure
The shaft mine industrial surface covers some 10.4 Ha including 3.0 Ha of
approach roads. Located in a rural area it has electrical power supply, mains
water, mains sewage, and good access roads already established.
The VNP mine and surface facilities are easily accessible by road from the main
Verticalnaya site and located nearby is a rail line with facilities for wagon
loading. A new 6 kV power supply has been installed from the main Verticalnaya
mine surface sub-station to the VNP site.
The Verticalnaya Mine has two shafts. The materials shaft was installed and has
been operational for the transportation of men and material since 1975. The
sinking of the second shaft was completed just prior to the mine closure in 1998
and was not fully equipped or commissioned.
2.2.4 Mine History
Mining operations began initially during 1912 when coal was accessed from its
outcrop point on the surface via inclined drifts locally known as "number 10
mine". In 1975, mainly for ventilation purposes, a vertical shaft was sunk down
to the then lower workings at the -600 meters horizon, approximately 845 meters
below surface. This shaft was then used for the transportation of men and
materials. Also installed within the same shaft is a second winding facility
designed to wind out waste rock from development drivage.
Several phases of exploration drilling have been completed by the ministry since
1930, the most extensive phase being during the 1970s when over 200 cored
boreholes were drilled in the area of the Verticalnaya and adjacent mines.
As the mine working progressed even deeper to -1,000 meters level, approximately
1,245 meters below surface, the government provided capital investment for the
sinking of a second shaft for improved ventilation and also to be utilized for
the winding of material (Skip shaft). The main objective of the new shaft was to
replace the long string of conveyor belts installed along the length of the
existing inclined drifts.
In 1998, due to a lack of the investment required to complete the new
infrastructure and maintain the mine's equipment, the managers of the
Verticalnaya mine were unable to achieve the mine's coal output target. The
Verticalnaya mine was considered unprofitable and closed and passed to the State
Enterprise Ukruglerestructurizatsiya ("UDKR"). UDKR is responsible for the
liquidation of closed mines and the management of those mines on a care and
maintenance basis to enable them to act as water pumping stations to protect
adjacent operating mines from increased water inflows from the closed mines.
EastCoal has leased the Verticalnaya mine until 26 May 2029 from the State
Property fund. The H8 seam was mined until the closure of the mine in 1998. No
coal was previously mined from the H11B and H10B seams.
The original mine site has two existing vertical shafts through which mine water
is currently being pumped in order to maintain the mine water at its current
level and to protect the mine entry workings from the flooded workings below.
Access to H8 seam will eventually be gained when the water level is lowered by
increased pumping.
The second site, known as the Verticalnaya North Project (VNP) site, is being
used to develop two surface drifts to access the H11 seam. The VNP site is
approximately 1.5 km north of the main mine site. This work commenced in 2010,
the drifts have now accessed the H11 seam and work has commenced on the
development of the East 1 and West 1 coal faces.
First coal from VNP was produced from the East 1 block in late July 2013, three
weeks later than scheduled due to a delay in obtaining certain regulatory
approvals. Initial production will be extracted using simple mining techniques
and the coal produced will be toll treated at a wash plant adjacent to the mine.
The Company is expected to ramp up to an initial 4,000 tonnes per month
increasing to 11,000 tonnes per month during Q4 2013 applying conventional
mining methods and locally manufactured equipment.
2.3 Menzhinsky
As previously disclosed, the Board of Directors resolved on 22 May 2013 to place
Inter-Invest into liquidation. The insolvency application process is ongoing and
it is expected that Inter-Invest will formally enter liquidation in September
2013. The Menzhinsky cash generating unit was recorded as a discontinued
operation in the Company's unaudited interim condensed consolidated financial
statements for the three and six months ended June 30, 2013.
2.4 Results of Operations
For the three months For the six months
ended ended
----------------------------------------------------------------------------
In thousands of Canadian
dollars unless otherwise June 30, June 30, June 30, June 30,
noted 2013 2012 2013 2012
----------------------------------------------------------------------------
Expenses
General and
administrative expenses (1,207) (722) (2,777) (1,325)
Gain on revaluation of
derivative liability - 650 - 989
Gain on settlement of
debt - - 2,376 -
Other gains and losses - - - 16
Interest income - 8 9 25
Interest expense (26) (37) (151) (71)
Loss for the period from
continuing operations (1,233) (101) (543) (366)
Loss for the period from
discontinued operations (18,366) (402) (37,111) (402)
--------------------------------------------------
Loss for the period before
tax $ (19,599) $ (503) $ (37,654) $ (768)
--------------------------==================================================
General and administrative expenses increased in the six months ended June 30,
2013 over the same period in 2012 predominantly as a result of the recording of
various corporate and consulting costs through the income statement, which were
capitalized prior to the acquisition of Menzhinsky in Q2 2012. In addition,
legal and consulting fees increased as a result of the dual quotation of the
Company on both the TSX-V and the AIM.
The loss for the period from discontinued operations relates to the Company's
wholly owned subsidiary, Inter-Invest, which owns the Menzhinsky Mine. The
recognition of the Menzhinsky cash generating unit as a discontinued operation
follows the resolution by the Board of directions on May 22, 2013 to place
Inter-Invest into liquidation. The assets of Inter-Invest, excluding cash, have
been impaired to a value of nil to reflect the Board's view that the Company may
not be able to gain any value from the disposal of the assets in liquidation. As
at June 30, 2013 Inter-Invest was in the process of being placed into
liquidation. Upon entering liquidation, it is expected that the consolidated
liabilities of Inter-Invest totaling $18,774,000 will no longer be recognized in
the Company's financial statements resulting in a one-off gain for accounting
purposes.
For the three months ended June 30, 2013 the Company earned $nil of interest on
its excess cash deposits compared to $7,550 for the same period in the prior
year.
For the three months ended June 30, 2013 the Company incurred $25,792 of
financing costs compared to $37,132 for the same period in the prior year. The
decrease in financing costs was due to a reduction in the Company's convertible
debt.
2.5 Development mine - Verticalnaya
The development of VNP continues as expected, although there were delays in the
development as a result of the working capital challenges experienced during the
quarter.
First coal production occurred in July 2013 and the Company's is planning to
ramp up production in Q3 and Q4 2013.
Development costs to date at Verticalnaya are as follows:
June 30, December 31,
2013 2012
----------------------------------------------------------------------------
Verticalnaya Coal Mine, Ukraine
Mineral property
Balance, beginning of period $ 16,417 $ 16,816
Mine license (9) (15)
Change due to foreign exchange rate
fluctuations 979 (384)
-----------------------------
Balance, end of period $ 17,387 $ 16,417
-----------------------------
Deferred costs
Balance, beginning of period $ 31,579 $ 17,507
Lease and operating costs 4,117 13,307
Interest and accretion expense on
convertible debt 207 1,160
Change due to foreign exchange rate
fluctuations 1,864 (395)
-----------------------------
Balance, end of period $ 37,769 $ 31,579
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----------------------------------------------------------------------------
Verticalnaya Coal Mine, Ukraine - Balance, end
of period $ 55,156 $ 47,996
----------------------------------------------------------------------------
3 Selected Annual Information
No cash dividends have been declared or paid since the date of incorporation and
the Company has no present intention of paying dividends on its common shares.
The Company anticipates that all available funds will be invested to finance the
growth of its business.
Fiscal Year / $000's except per share amounts 2012 2011 2010
----------------------------------------------------------------------------
Net Sales $ 3,988 Nil Nil
Comprehensive (loss) income $ (6,686) $ 1,370 $ 3,841
Basic and diluted income (loss) per share $ (0.24) $ (0.10) $ (0.41)
Total Assets $ 93,322 $ 53,003 $ 31,088
Total Long-term liabilities $ 12,475 $ - $ 3,591
Cash dividends per share, common N/A N/A N/A
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4 Summary of Quarterly Results
Selected financial information for each of the eight most recently completed
quarters are as follows:
$000's except per
share 2013 2012 2011
----------------------------------------------------------------------------
Amounts Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
----------------------------------------------------------------------------
Compre-
hensive
(loss)
income (18,379) (16,361) (1,053) (5,469) 230 (404) (728) 2,643
Basic and
diluted
income
(loss) per
share -
continuing
operations ($0.03) $0.02 ($0.01) ($0.02) ($0.00) ($0.01) $(0.05) $0.08
Basic and
diluted
income
(loss) per
share -
discontinued
operations ($0.42) ($0.57) ($0.07) ($0.09) ($0.02) - - -
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On August 8, 2013 the Company consolidated its shares on a ratio of ten (10)
pre-consolidation common shares to one (1) post-consolidation common share,
consolidating the Company's 728,048,493 then issued and outstanding common
shares to 72,804,849 common shares following the consolidation. The
post-consolidation number of shares has been retrospectively applied for the
purpose of calculating earnings per share.
5 Liquidity and Capital Resources
Production at Verticalnaya is forecast to ramp up over the remainder of 2013 and
2014. Recovery of the carrying value of the Verticalnaya assets depends on the
attainment of profitable production on time and within budget, its profitable
disposition and/or the introduction of a joint venture partner.
Due to operational failure and ongoing technical challenges the Board of
Directors resolved on May 22, 2013 to place Inter-Invest, the wholly owned
subsidiary that owns the Menzhinsky operations, into liquidation.
The Company has experienced recurring operating losses and has accumulated a
deficit of $60,438,343 at June 30, 2013. For the six month period ended June 30,
2013 the Company incurred a loss of $37,654,402 and used cash in operating
activities totaling $6,426,616. The loss incurred includes losses relating to
discontinued operations of $37,111,000, of which $26,070,000 represents
impairment of assets and a further $4,747,000 of loan adjustments. The losses
relating to impairment and loan adjustments do not have a cash flow impact on
the business. The Company had a working capital deficit of $16,315,173 at June
30, 2013. The working capital deficit includes liabilities of $18,773,534
relating to the discontinued operations. Upon entering liquidation, it is
expected that the liabilities of Inter-Invest will no longer be recognized in
the Company's financial statements. Working capital is defined as current assets
less current liabilities and provides a measure of the Company's ability to
settle liabilities that are due within one year with assets that are also
expected to be converted into cash within one year.
The Company's continued operations are dependent upon its ability to raise
additional funding, the Verticalnaya mine being able to increase production on
budget and on time, and Inter-Invest being successfully placed into liquidation.
The Company is currently in the process of putting together a rights offering to
existing shareholders, though there can be no certainty on the outcome of the
rights offer. The Company does not have any financing facilities in place.
Management has taken steps to mitigate the liabilities relating to Inter-Invest
and it is expected that Inter-Invest will be placed into liquidation during
September 2013. Upon entering liquidation, it is expected that the liabilities
of Inter-Invest will no longer be recognized in the Company's financial
statements resulting in a one-off gain for accounting purposes.
There are no assurances that the Company will be successful in securing further
equity financing as and when required. As a result, there are material
uncertainties that the entity will be able to continue as a going concern, and
realize its assets and discharge its liabilities in the normal course of
business. The Financial Statements do not include adjustments to the amounts and
classifications of assets and liabilities that might be necessary should the
Company be unable to continue as a going concern. These adjustments may be
material.
The market capitalization of the Company on August 28, 2013 was approximately
$8.7 million (based on the closing price of the Company's shares recorded on the
TSX-V on that date), which is significantly lower than the carrying value of the
Verticalnaya mine recorded on the Company's balance sheet at June 30, 2013.
Management believes that no impairment of the carrying value of the Verticalnaya
mine is necessary as internal valuations support the recorded value.
Debt financing has not been used to fund the Company's property acquisitions and
development activities, apart from the convertible debentures. The Company
expects to make arrangements for debt financing in future. The Company does not
have "standby" credit facilities, or off-balance sheet arrangements and it does
not use hedges or other financial derivatives.
At June 30, 2013, the Company held cash and cash equivalents of $3,858,137 (2012
- $983,210); while short term investments in Guaranteed Investment Certificates
were $nil (2012 - $10,500,000).
6 Off-Balance Sheet Arrangements
The Company does not utilize off-balance sheet arrangements.
7 Transactions with Related Parties
During the three and six months ended June 30, the Company paid or accrued:
For the three months For the six months
ended ended
----------------------------------------------------------------------------
In thousands of Canadian
dollars unless otherwise June 30, June 30, June 30, June 30,
noted 2013 2012 2013 2012
Directors fees 25,000 25,000 50,000 50,000
Consulting fees to directors
and officers - expensed 8,826 15,255 127,351 57,315
Consulting fees to directors
and officers - capitalized - 122,133 - 140,175
Office rent paid or accrued
to a company with a director
in common 15,000 6,000 30,000 12,000
Office rent paid or accrued
to a director - - - 2,550
----------------------------------------------------------------------------
Included in accounts payable and accrued liabilities is a total of $106,703
(December 31, 2012 - $151,224) due to related parties for office costs,
directors' fees, and consulting fees and expenses. The amounts due to related
parties are unsecured, non-interest bearing and have no specific terms of
repayment.
On May 31, 2013 the Company entered into a short term loan agreement with Salida
Capital International Corp for $350,000 to fund some immediate obligations at
Verticalnaya pending completion of the private placement. The loan was repaid in
June 2013 following the private placement.
8 Significant Accounting Policies and Critical Accounting Estimates
The preparation of financial statements in conformity with IFRS requires
management to make estimates and assumptions which affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
for the periods reported. The Company's accounting policies are described in
Note 3 to the December 31, 2012 audited consolidated financial statements.
9 Forward-Looking Statements
This MD&A contains certain forward-looking statements. These statements relate
to future events or future performance and reflect management's expectations and
assumptions regarding the growth, results of operations, performance, prospects
and opportunities of the Company. When used in this MD&A, such statements use
words such as "may", "would", "could", "will", "expect", "believe", "plan",
"anticipate", "forecast", "estimate", "predict", "potential", "budget", or the
negative of these terms or other similar expressions concerning matters that are
not historical fact. In particular, statements regarding the Company's future
operating plans including reactivation of the development work on the
ventilation and conveyor roadways and the expected timing of commencement of
commercial production at the Company's Verticalnaya Mine, the expected average
price of coal to be received by the Company from any off-take arrangements, the
liquidation in Ukraine of Inter-Invest and the legal and financial implications
of the liquidation process to the Company, economic performance and product
development efforts are or involve forward-looking statements. These statements
reflect management's expectations as of the date of such forward-looking
statement regarding the Company's future operational or financial performance
and should not be read as guarantees of future performance or results.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results or performance of the Company to
be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements, including, but not
limited to, the risk factors disclosed in the Company's AIF and in certain
documents incorporated by reference herein. Although the Company has attempted
to identify important factors that could cause actual results, performance or
achievements to differ materially from those described in forward-looking
statements, there may be other factors that cause results, performance or
achievements not to be as anticipated, estimated or intended. There can be no
assurance that actual events, performance or results will be consistent with
these forward-looking statements and accordingly readers should not place undue
reliance on forward-looking statements. The Company assumes no obligation to
update or revise forward-looking statements to reflect new events or
circumstances, except as required by law.
10 Outstanding Share data as at August 29, 2013:
a) Authorized and issued share capital:
----------------------------------------------------------------------------
Class Par Value Authorized Issued Number
----------------------------------------------------------------------------
Common No par value Unlimited 72,804,849
----------------------------------------------------------------------------
b) Summary of warrants outstanding:
----------------------------------------------------------------------------
Security Number Exercise Price Expiry Date
----------------------------------------------------------------------------
Warrants 400,000 7.00 May 31, 2014
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Warrants 291,600 3.50 May 31, 2015
----------------------------------------------------------------------------
Warrants 4,860,000 5.50 May 31, 2015
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5,551,600
----------------------------------------------------------------------------
c) Summary of options outstanding:
----------------------------------------------------------------------------
Security Number Exercise Price Expiry Date
----------------------------------------------------------------------------
Options 197,500 3.00 September 15, 2014
----------------------------------------------------------------------------
Options 120,000 3.00 July 27, 2015
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Options 75,000 7.00 February 4, 2016
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Options 75,000 7.00 March 14, 2016
----------------------------------------------------------------------------
Options 75,000 7.00 July 6, 2016
----------------------------------------------------------------------------
Options 15,000 6.50 January 19, 2017
----------------------------------------------------------------------------
Options 250,000 4.10 May 31, 2017
----------------------------------------------------------------------------
----------------------------------------------------------------------------
807,500
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11 Subsequent Events
11.1 Share consolidation
On August 8, 2013 the Company consolidated its shares on a ratio of ten (10)
pre-consolidation common shares to one (1) post-consolidation common shares,
consolidating the Company's 728,048,493 issued and outstanding common shares to
72,804,849 common shares following the consolidation.
The Company also consolidated its outstanding options and warrants on a ratio of
ten (10) to one (1), with the result that each consolidated option and warrant
will now entitle the holder to acquire one common share in the capital of the
Company at an exercise price equal to ten (10) times its original exercise
price.
12 Internal Control and Disclosure Controls Over Financial Reporting:
On November 23, 2007, the British Columbia Securities Commission exempted
Venture Issuers, such as the Company, from certifying disclosure controls and
procedures, as well as internal controls over financial reporting as of December
31, 2007 and thereafter. The Company is now required to file basic certificates.
The Company makes no assessment relating to establishment and maintenance of
disclosure controls and procedures as defined under National Instrument 52-109
as at December 31, 2012.
13 Other Information:
For additional disclosures concerning the Company's general and administrative
expenses and mineral properties, please refer to the audited consolidated annual
financial statements for the year ended December 31, 2012, which are available
on the Company's website at www.eastcoal.ca or on SEDAR at www.sedar.com.
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------
For the three and six months ended June 30, 2013
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(all tabular amounts in thousands of Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, December 31,
2013 2012
----------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 3,858 $ 4,773
Restricted cash 241 -
Short term investments - 5,000
Trade and other receivables 127 1,300
Inventory (Note 3) 498 1,769
Prepaid expenses 328 481
Assets of discontinued
operations (Note 6) 20 -
---------------------------------------------
Total current assets 5,072 13,323
Non-current assets
Mineral properties (Note 4) 55,156 57,618
Non-current inventory (Note
3) - 4,992
Property, plant and equipment
(Note 5) 6,180 12,115
Goodwill - 4,940
Intangibles 247 327
Reclamation bond 7 7
---------------------------------------------
TOTAL ASSETS $ 66,662 $ 93,322
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LIABILITIES
Current
Trade and other payables $ 2,406 $ 8,211
Pension liabilities 7 619
Borrowings (Note 7) 200 5,298
Liabilities of discontinued
operations (Note 6) 18,774 -
---------------------------------------------
21,387 14,128
Non-current liabilities
Asset retirement obligations 655 588
Borrowings (Note 7) 1,081 4,801
Deferred tax 3,081 4,114
Pension liabilities 311 2,972
---------------------------------------------
TOTAL LIABILITIES 26,515 26,603
---------------------------------------------
EQUITY
Share capital (Note 8) 89,191 81,626
Contributed surplus 9,968 9,364
Accumulated other
comprehensive income (loss) 1,426 (1,487)
Deficit (60,438) (22,784)
---------------------------------------------
TOTAL EQUITY 40,147 66,719
---------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 66,662 $ 93,322
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Corporate information and going concern (Note 1)
On behalf of the Board:
(signed) John Byrne Director (signed) Abraham Jonker Director
--------------------- -------------------------------------
The accompanying notes are an integral part of these financial statements.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(all tabular amounts in thousands of Canadian dollars, except per share
figures)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three For the six
months ended months ended
June June June June
30, 2013 30, 2012 30, 2013 30, 2012
----------------------------------------------------------------------------
Expenses
General and
administrative
expenses (1,207) (722) (2,777) (1,325)
Gain on revaluation
of derivative
liability - 650 - 989
Gain on settlement of
debt (Note 7) - - 2,376 -
Other gains and
losses (net) - - - 16
-------------------------------------------------------
(1,207) (72) (401) (320)
-------------------------------------------------------
Interest income - 8 9 25
Finance expense (26) (37) (151) (71)
-------------------------------------------------------
Net interest
(expense) income (26) (29) (142) (46)
-------------------------------------------------------
Loss for the period
from continuing
operations (1,233) (101) (543) (366)
Discontinued
operations (Note 6)
Revenue 143 823 804 823
Cost of sales (2,803) (1,083) (5,768) (1,083)
-------------------------------------------------------
Gross loss (2,660) (260) (4,964) (260)
-------------------------------------------------------
General and
administrative
expenses (1,124) (123) (1,413) (123)
Impairment (8,123) - (26,070) -
Loss on increase of
debt (4,747) - (4,747) -
Other gains and
losses (net) (1,037) 1 (1,037) 1
Net interest expense (52) (20) (110) (20)
-------------------------------------------------------
(15,083) (142) (33,377) (142)
-------------------------------------------------------
Income tax (expense)
recovery (623) - 1,230 -
Loss for the period
from discontinued
operations (18,366) (402) (37,111) (402)
(Note 6)
-------------------------------------------------------
Loss for the period $ (19,599) $ (503) $ (37,654) $ (768)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net loss per common
share (Note 12.1)
Basic and diluted -
continuing
operations ($0.03) ($0.00) ($0.01) ($0.02)
Basic and diluted -
discontinued
operations ($0.42) ($0.02) ($0.96) ($0.02)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average
number of common
shares
outstanding - basic
and diluted 44,035,619 21,250,450 38,514,768 20,283,417
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(all tabular amounts in thousands of Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three For the six
months ended months ended
June June June June
30, 2013 30, 2012 30, 2013 30, 2012
----------------------------------------------------------------------------
Loss for the period $ (19,599) $ (503) $ (37,654) $ (768)
Other comprehensive
income (loss)
Items that will be
reclassified
subsequently to
profit and loss
Cumulative
translation
adjustment 1,220 733 2,913 593
--------------------------------------------------------
Other comprehensive
income (loss) for
the period 1,220 733 2,913 593
--------------------------------------------------------
Comprehensive income
(loss) for the
period $ (18,379) $ 230 $ (34,741) $ (175)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(all tabular amounts in thousands of Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number Contributed
of shares Share capital surplus
----------------------------------------------------------------------------
Balance - January 1,
2012 195,164 $ 57,577 $ 2,792
Net loss for the
period - - -
Other comprehensive
income - - -
----------------------------------------------------
- - -
----------------------------------------------------
Private placement 48,600 12,673 4,765
Share issue costs - (2,003) -
Business combination
Issue of shares 4,000 1,440 -
Granting of options - - 315
Equity component of
convertible
debenture - - 908
Employee share options
granted - - 583
----------------------------------------------------
Balance - June 30,
2012 247,764 $ 69,687 $ 9,364
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance - January 1,
2013 325,569 $ 81,626 $ 9,364
Net loss for the
period - - -
Other comprehensive
income - - -
----------------------------------------------------
- - -
----------------------------------------------------
Issue of shares 402,479 8,762 -
Share issue costs - (1,197) -
Issue of convertible
debt - - 604
----------------------------------------------------
Balance - June 30,
2013 728,048 $ 89,191 $ 9,968
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated other
comprehensive
income (loss) Deficit Total Equity
----------------------------------------------------------------------------
Balance - January 1,
2012 $ (153) $ (17,432) $ 42,784
Net loss for the
period - (768) (768)
Other comprehensive
income 593 - 593
------------------------------------------------------
593 (768) (175)
------------------------------------------------------
Private placement - - 17,438
Share issue costs - - (2,003)
Business combination
Issue of shares - - 1,440
Granting of options - - 315
Equity component of
convertible
debenture - - 908
Employee share options
granted - - 583
------------------------------------------------------
Balance - June 30,
2012 $ 440 $ (18,200) $ 61,291
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance - January 1,
2013 $ (1,487) $ (22,784) $ 66,719
Net loss for the
period - (37,654) (37,654)
Other comprehensive
income 2,913 - 2,913
------------------------------------------------------
2,913 (37,654) (34,741)
------------------------------------------------------
Issue of shares - - 8,762
Share issue costs - - (1,197)
Issue of convertible
debt - - 604
------------------------------------------------------
Balance - June 30,
2013 $ 1,426 $ (60,438) $ 40,147
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On August 8, 2013 the Company consolidated its shares on a ratio of ten (10)
pre-consolidation common shares to one (1) post-consolidation common shares,
consolidating the Company's 728,048,493 issued and outstanding common shares to
72,804,849 common shares following the consolidation. These financial statements
reflect the pre-consolidated figures, however, the post-consolidation number of
shares has been retrospectively applied for the purpose of calculating loss per
share.
The accompanying notes are an integral part of these financial statements.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(all tabular amounts in thousands of Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the six months ended
June 30, 2013 June 30, 2012
----------------------------------------------------------------------------
OPERATING ACTIVITIES
Loss for the period $ (37,654) $ (366)
Add items not affecting cash
Depletion, depreciation and
amortisation 12 (1)
Share-based compensation - 583
Gain on revaluation of derivative
liability - (989)
Gain on settlement of debt (2,376) -
Accretion expense 244 115
Unrealized foreign exchange (gains)
losses 63 (22)
Operating cash flows from discontinued
operations 30,903 (315)
------------------------------------
(8,808) (995)
Changes in non-cash working capital
balances related to operations
Trade and other receivables 212 391
Prepaid expenses 163 64
Inventories 175 257
Trade and other payables (2,222) (2,568)
Working capital balances related to
discontinued operations 4,053 374
------------------------------------
Cash used in operating activities (6,427) (2,477)
------------------------------------
INVESTING ACTIVITIES
Mineral properties (4,866) (6,470)
Property, plant and equipment (286) (1,819)
Intangibles - (83)
Business combination - (3,275)
Reclamation bonds - 2
Restricted cash (241) -
Short term investments 5,000 (2,500)
Investing cash flows from discontinued
operations 674 (485)
------------------------------------
Cash generated by (used in) investing
activities 281 (14,630)
------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of shares 6,503 15,435
Repayment of debt (693) -
Financing cash flows from discontinued
operations (598) -
------------------------------------
Cash generated by financing activities 5,212 15,435
------------------------------------
Net increase (decrease) in cash for the
period (934) (1,672)
Cash and cash equivalents, beginning of
period 4,773 2,655
Exchange gains/(losses) on cash and cash
equivalents 39 -
------------------------------------
Cash and cash equivalents, end of period
- continuing operations $ 3,858 $ 907
Cash and cash equivalents, end of period
- discontinued operations 20 76
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental cash flow information - Note 10
The accompanying notes are an integral part of these financial statements.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the periods ended June 30, 2013 and 2012
(all tabular amounts in thousands of Canadian dollars except per share
figures and unless otherwise noted)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. Corporate information and going concern
EastCoal Inc. (the "Company") was incorporated on December 15, 1986 under the
laws of the Province of British Columbia, CANADA. Its principal business
activity is the acquisition and development of mineral properties and its
registered address is 20th floor, 250 Howe Street, Vancouver, British Columbia,
CANADA, V6C 3R8 and its head office is located at Suite 130, 889 Harbourside
Drive, North Vancouver, British Columbia, CANADA, V7P 3S1.
The Company is focused on the Verticalnaya Mine located in the Donbass Region of
Ukraine. The Verticalnaya Mine is an advanced anthracite coal project in the
construction phase. Recovery of the carrying value of the Verticalnaya assets
depends on the attainment of profitable production on time and within budget,
its profitable disposition or the introduction of a joint venture partner. Due
to operational failure and ongoing technical challenges the Board of Directors
resolved on May 22, 2013 to place Inter-Invest LLC ("Inter-Invest"), the wholly
owned subsidiary that owns the Menzhinsky operations, into liquidation.
The Company has experienced recurring operating losses and has accumulated a
deficit of $60,438,343 at June 30, 2013. For the six month period ended June 30,
2013 the Company incurred a loss of $37,654,402 and used cash in operating
activities totaling $6,426,616. The loss incurred includes losses relating to
discontinued operations of $37,111,000, of which $26,070,000 represents
impairment of assets and a further $4,747,000 of loan adjustments. The losses
relating to impairment and loan adjustments do not have a cash flow impact on
the business. The Company had cash and cash equivalents of $3,858,137 and a
working capital deficit of $16,315,173 at June 30, 2013. The working capital
deficit includes liabilities of $18,773,534 relating to the discontinued
operations. Upon entering liquidation, it is expected that the liabilities of
Inter-Invest will no longer be recognized in the Company's financial statements.
Working capital is defined as current assets less current liabilities and
provides a measure of the Company's ability to settle liabilities that are due
within one year with assets that are also expected to be converted into cash
within one year.
The Company's continued operations are dependent upon its ability to raise
additional funding, the Verticalnaya mine being able to increase production on
budget and on time, and Inter-Invest being successfully placed into liquidation.
The Company is currently in the process of putting together a rights offering to
existing shareholders, though there can be no certainty on the outcome of the
rights offer. The Company does not have any financing facilities in place.
Management has taken steps to mitigate the liabilities relating to Inter-Invest
and it is expected that Inter-Invest will be placed into liquidation during
September 2013. Upon entering liquidation, it is expected that the liabilities
of Inter-Invest will no longer be recognized in the Company's financial
statements resulting in a one-off gain for accounting purposes.
There are no assurances that the Company will be successful in securing further
equity financing as and when required. As a result, there are material
uncertainties that the entity will be able to continue as a going concern, and
realize its assets and discharge its liabilities in the normal course of
business. These consolidated financial statements do not include adjustments to
the amounts and classifications of assets and liabilities that might be
necessary should the Company be unable to continue as a going concern. These
adjustments may be material.
2. Basis of presentation
These interim condensed consolidated financial statements have been prepared in
accordance with IAS 34, Interim Financial Reporting ("IAS 34") and follow the
same accounting policies and methods of application as contained in the annual
financial statements for the year ended December 31, 2012 with the exception of
those outlined below. Accordingly, they should be read in conjunction with the
Company's most recent annual financial statements. These interim condensed
consolidated financial statements were approved by the Board of Directors on
August 28, 2013.
2.1 New IFRS Pronouncements
The accounting policies adopted in the preparation of the interim condensed
consolidated financial statements are consistent with those followed in the
preparation of the Company's annual consolidated financial statements for the
year ended December 31, 2012, except for the adoption of new standards and
interpretations effective as of January 1, 2013.
IFRS 7, "Financial instruments: Disclosure" has been amended to require
additional disclosure on offsetting of financial assets and financial
liabilities.
IFRS 13, "Fair Value Measurement" sets out in a single IFRS a framework for
measuring fair value. IFRS 13 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. This definition
of fair value emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. In addition, IFRS 13 also requires specific
disclosures about fair value measurement.
Amendments to IAS 19, "Employee Benefits" outlines the accounting requirements
for employee benefits, including short-term benefits (e.g. wages and salaries,
annual leave), post-employment benefits such as retirement benefits, other
long-term benefits (e.g. long service leave) and termination benefits.
There was no material impact on the consolidated financial statements from the
adoption of any of these accounting pronouncements.
Several other new standards and amendments apply for the first time in 2013.
However, they do not impact the annual consolidated financial statements of the
Company or the interim condensed consolidated financial statements of the
Company.
2.2 Presentation of condensed consolidated interim statements
The presentation of the interim condensed consolidated statements of financial
position, the interim condensed consolidated statements of loss and the interim
condensed consolidated statements of cash flows have changed from the year ended
December 31, 2012 as the Menzhinsky cash generating unit has been reported as a
discontinued operation following the resolution by the Board of Directors on May
22, 2013 to place Inter-Invest, the wholly owned subsidiary that owns the
Menzhinsky operations, into liquidation.
3. Inventory
---------------------------------------------------------------------------
---------------------------------------------------------------------------
June 30, 2013 December 31, 2012
---------------------------------------------------------------------------
Consumables and spares $ 701 $ 856
Coal stockpile - 832
Coal inventory 20 81
Transferred to discontinued
operations (Note 6) (223) -
---------------------------------------------
498 1,769
Non-current coal stockpile 6,168 4,992
Transferred to discontinued
operations (Note 6) (6,168) -
---------------------------------------------
$ 498 $ 6,761
---------------------------------------------
---------------------------------------------
4. Mineral properties
4.1 Verticalnaya Coal Mine, Ukraine
---------------------------------------------------------------------------
---------------------------------------------------------------------------
June 30, December 31,
2013 2012
---------------------------------------------------------------------------
Verticalnaya Coal Mine,
Ukraine
Mineral property
Balance, beginning of
period $ 16,417 $ 16,816
Mine license (9) (15)
Change due to foreign
exchange rate
fluctuations 979 (384)
----------------------------------------------
Balance, end of period $ 17,387 $ 16,417
----------------------------------------------
Capitalized costs
Balance, beginning of
period $ 31,579 $ 17,507
Lease and other costs 4,117 13,307
Interest and accretion
expense on convertible
debt 209 1,160
Change due to foreign
exchange rate
fluctuations 1,864 (395)
----------------------------------------------
Balance, end of period $ 37,769 $ 31,579
----------------------------------------------
Verticalnaya Coal Mine,
Ukraine - Balance, end of
period $ 55,156 $ 47,996
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The Verticalnaya Coal Mine is an anthracite coal mine located on the Eastern
side of Ukraine. The Company acquired the rights to Verticalnaya in 2009.
4.2 Menzhinsky Coal Mine, Ukraine
---------------------------------------------------------------------------
---------------------------------------------------------------------------
June 30, December 31,
2013 2012
---------------------------------------------------------------------------
Menzhinsky Coal Mine, Ukraine
Mineral property
Balance, beginning of
period $ 9,622 $ -
Acquisition through
business combination - 9,953
Depletion (9) (31)
Change due to foreign
exchange rate
fluctuations 568 (300)
Transferred to
discontinued operations
(Note 6) (10,181) -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Menzhinsky Coal Mine, Ukraine
- Balance, end of period $ - $ 9,622
---------------------------------------------------------------------------
---------------------------------------------------------------------------
5. Property, plant and equipment
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Assets under
Buildings Equipment Vehicles construction Total
-------------------------------------------------------------
Year ended
December 31,
2012
At January 1,
2012 $ 1,132 $ 2,064 $ 256 $ 1,322 $ 4,774
Additions 99 $ 1,437 - 3,332 4,868
Business
combination 987 1,318 31 1,320 3,656
Commissioned - 3,746 - (3,746) -
Disposals - (3) - - (3)
Depreciation (118) (947) (39) - (1,104)
Change due to
foreign
exchange rate
fluctuations (43) (11) (4) (18) (76)
----------------------------------------------------------------------------
At December 31,
2012 $ 2,057 $ 7,604 $ 244 $ 2,210 $ 12,115
----------------------------------------------------------------------------
At December 31,
2012
Cost 2,616 9,470 487 2,210 14,783
Accumulated
depreciation (559) (1,866) (243) - (2,668)
----------------------------------------------------------------------------
Net book value $ 2,057 $ 7,604 $ 244 $ 2,210 $ 12,115
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Period ended
June 30, 2013
At January 1,
2013 $ 2,057 $ 7,604 $ 244 $ 2,210 $ 12,115
Additions - 269 - 116 385
Commissioned - 5 - (5) -
Disposals - (4,145) - - (4,145)
Depreciation (70) (377) (24) - (471)
Change due to
foreign
exchange rate
fluctuations 121 349 13 132 615
Transferred to
discontinued
operations
(Note 6) (910) (1,396) (13) - (2,319)
----------------------------------------------------------------------------
At June 30,
2013 $ 1,198 $ 2,309 $ 220 $ 2,453 $ 6,180
----------------------------------------------------------------------------
At June 30,
2013
Cost 1,306 3,244 289 2,453 7,292
Accumulated
depreciation (108) (935) (69) - (1,112)
----------------------------------------------------------------------------
Net book value $ 1,198 $ 2,309 $ 220 $ 2,453 $ 6,180
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Of the depreciation of $470,513 (2012 - $233,794) for the six months ended June
30, 2013, $1,145 (2012 - $10,502) was charged to the statement of loss as part
of Depreciation, $337,110 (2012 - $175,936) was capitalized to mineral
properties, and $132,258 (2012 - $47,356) related to discontinued operations.
6. Discontinued Operation
On May 22, 2013 the Board of directions resolved to place Inter-Invest, the
wholly owned subsidiary of EastCoal Inc., that owns and operated the Menzhinsky
Mine and wash plant, into administration and/or liquidation. The reason for the
board decision was the continued geological and technical challenges at these
operations and the resulting operating losses that the Company could no longer
finance. As a result, the assets of Inter-Invest, excluding cash, have been
impaired to a value of nil to reflect the Board's view that the Company may not
be able to gain any value from the disposal of the assets in the administration
and/or liquidation process. These financial statements do not include any future
benefit from the expected derecognizing of the liabilities relating to
Inter-Invest upon its liquidation. As at June 30, 2013 Inter-Invest was in the
process of being placed into liquidation.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Assets of discontinued operations June 30, 2013 December 31, 2012
---------------------------------------------------------------------------
Cash $ 20 -
------------------------------------------
------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities of discontinued
operations June 30, 2013 December 31, 2012
----------------------------------------------------------------------------
Trade and other payables $ 6,236 $ -
Pension liabilities 3,552 -
Borrowings 8,986 -
--------------------------------------------
18,774 -
--------------------------------------------
--------------------------------------------
At acquisition, Inter-Invest had certain liabilities owing to a Ukrainian
financial institution. The loan is unsecured, repayable in quarterly instalments
of US$583,333 and bears no interest. As a result of the non-payment of
instalments for the quarters ended March 31, 2013 and June 30, 2013, the Company
recognised an expense of $4,746,409, in period ended June 30, 2013 which
reflects additional payments required by Inter-Invest under the loan agreement.
The accumulated other comprehensive income balance at June 30, 2013 relating to
Menzhinsky was $1,362,294.
7. Borrowings
---------------------------------------------------------------------------
---------------------------------------------------------------------------
June 30, 2013 December 31, 2012
---------------------------------------------------------------------------
Current
Convertible debentures $ - $ 2,196
Other loans 9,186 3,102
Transferred to discontinued
operations (Note 6) (8,986) -
---------------------------------------------
$ 200 $ 5,298
---------------------------------------------
---------------------------------------------
Non-current
Convertible debentures $ 1,081 $ 3,334
Other loans - 1,467
---------------------------------------------
$ 1,081 $ 4,801
---------------------------------------------
---------------------------------------------
7.1 Convertible debentures
7.1.1 Surrey Dynamics
On November 26, 2009, the Company acquired a 49% interest in East Coal Company
from Surrey Dynamics Limited ("Surrey Dynamics") of the United Kingdom.
Consideration paid was 5,000,000 common shares and an unsecured, three year,
convertible US$3,000,000 debenture ("Original Debenture"), maturing on 26
November 2012 ("Original Maturity Date").
The debenture could be converted at any time during the term into 8.0 million
common shares of the Company at a conversion price of US$0.3739. The principal
amount bore interest at the rate of 2% over the three month USD Libor rate per
annum, payable quarterly.
As the debenture was considered to be a compound financial instrument, the
principal amount was allocated between liability and equity components. The
equity component was determined to be a derivative liability as the conversion
price of the loan is denominated in a currency other than the Company's
functional currency. The fair value of the equity component was initially valued
at issuance at $2,476,000 using the Black-Scholes option pricing model assuming
a risk free rate of 1.88%, expected life of 3 years, volatility of 183.66% and
share price of US$0.35. The debt component was initially valued at $702,500 and
was accreted up to the principal balance over the term of the debenture using
the effective interest method.
On November 26, 2012, by way of a Supplemental Indenture (the "Supplemental
Indenture"), the Company and Surrey Dynamics amended the Original Debenture to
extend the Original Maturity Date to December 17, 2012 at which point the
Company would repay US$1,500,000 and enter into a new debenture for US$1,500,000
plus outstanding accrued interest on the Original Debenture (the "New
Debenture"). Further on December 14, 2012, the Company paid US$800,000, plus a
financing charge of $50,000, to Surrey Dynamics and agreed to extend the
Original Maturity Date to January 3, 2013, at which point the Company made
further payment of US$700,000 to Surrey Dynamics.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Convertible debenture Debt Derivative
component liability Total
----------------------------------------------------------------------------
Balance at January 1,
2012 $ 1,949 $ 1,146 $ 3,095
Interest accreted 1,102 - 1,102
Interest capitalised 17 - 17
Principal repayment (800) - (800)
Gain on revaluation - (1,146) (1,146)
Foreign exchange change
upon conversion of USD (72) - (72)
---------------------------------------------------
Balance at December 31,
2012 $ 2,196 $ - $ 2,196
Interest capitalised - - -
Principal repayment (689) - (689)
Conversion to New
Debenture (1,499) - (1,499)
Foreign exchange change
upon conversion of USD (8) - (8)
---------------------------------------------------
Balance at June 30, 2013 $ - $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On January 3, 2013, following the repayment of US$700,000 to Surrey Dynamics,
the Company and Surrey Dynamics rolled over the outstanding balance of the
Original Debenture (US$1,517,174) into a new convertible debenture for a term of
2 years, an interest rate of 10%, and a conversion price of $0.23 per share
("New Debenture"). The remaining terms of the New Debenture are the same as the
Original Debenture.
Under the terms of the convertible debenture, the Company may elect to prepay it
prior to its maturity upon provision of 90 days written notice to the holder.
Should the Company choose to issue prepayment of the debenture, Surrey Dynamics
has the right to elect to (a) receive payment in cash of the principal amount
and all unpaid accrued interest or (b) convert the principal and all unpaid
accrued interest into common shares of the Company at a conversion price of
$0.23 per share.
As the New Debenture is considered to be a compound financial instrument, the
principal amount has been allocated between liability and equity components. The
fair value of the equity component was valued at issuance at $614,817 using the
Black-Scholes option pricing model assuming a risk free rate of 1.19%, expected
life of 2 years, volatility of 80.25% and share price of $0.22. The debt
component was initially valued at $902,357 and will accrete up to the principal
balance over the term of the debenture using the effective interest method.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Convertible debenture Amount
----------------------------------------------------------------------------
Proceeds on issuance of debenture 902
Interest accreted 127
Foreign exchange change upon
conversion of USD 52
------------------------------------------
Balance at June 30, 2013 $ 1,081
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7.1.2 Aponet
On May 31, 2012, the Company acquired a 100% interest in Inter-Invest Coal LLC
("Inter-Invest") from Aponet Enterprises Limited ("Aponet") of Cyprus.
Consideration paid was 4,000,000 common shares, $2 million cash, options to
purchase 4,000,000 common shares of the Company at a price of $0.70 and an
unsecured, four-year, convertible $4,000,000 debenture. The debenture may be
converted at any time during the term into 6,153,846 common shares of the
Company at a conversion price of $0.65. The principal amount bears interest at
the rate of 2% over the three month USD Libor rate per annum, payable quarterly.
As the debenture is considered to be a compound financial instrument, the
principal amount has been allocated between liability and equity components. The
debt component was initially valued at $3,091,684 and will accrete up to the
principal balance over the term of the debenture using the effective interest
method. The fair value of the equity component was valued at issuance at
$908,316 using the Black-Scholes option pricing model assuming a risk free rate
of 1.34%, expected life of 4 years, volatility of 73.22% and share price of
$0.36.
On March 11, 2013 the Company and Aponet agreed to amend the conversion price of
the convertible debenture in Note 7.1 from $0.65 to $0.23 per share and to
convert the debenture into 17,391,305 common shares, effective March 12, 2013.
The market price on the date of conversion was $0.06 and this resulted in a gain
on settlement of $2,375,644. Accordingly, no liability remained at June 30,
2013.
Convertible debenture Amount
----------------------------------------------------------------------------
Proceeds on issuance of debenture 3,092
Interest accreted 327
Conversion to equity (3,419)
-------------------------------------------
Balance at June 30, 2013 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7.2 Other loans
---------------------------------------------------------------------------
---------------------------------------------------------------------------
June 30, 2013 December 31, 2012
---------------------------------------------------------------------------
Inter-Invest loan $ 8,986 $ 4,369
Directors' loan 200 200
Transferred to discontinued
operations (Note 6) (8,986) -
---------------------------------------------
$ 200 $ 4,569
---------------------------------------------
---------------------------------------------
7.2.1 Directors' Loan
On November 28, 2012 three of the Company's directors agreed to provide bridging
finance to the Company for general working capital. The loan amounted to
$600,000 with a term of 12 months. The loan bore an interest rate of 12.0% per
annum compounded annually and payable at the time that the principal becomes due
and payable.
In order to secure the performance of the Company's obligations to the lenders
under the loan agreement, the Company executed GSAs, pursuant to which the
Company granted to the lenders security interests in all present and future
undertaking and property, both real and personal located in the province of
British Columbia, of the Company, as described in the GSA.
On December 31, 2012, $400,000 plus accrued interest of $4,077 was repaid to two
of the directors. As at June 30, 2013, $200,000 of the $600,000 loan was payable
and is included in borrowings.
7.2.2 Salida Loan
On May 31, 2013 the Company entered into a short term loan agreement with Salida
Capital International Corp for $350,000 to fund some immediate obligations at
Verticalnaya pending completion of the private placement. The loan was repaid in
June 2013 following the private placement.
8. Share capital
8.1 Share issue
On January 3, 2013, the Company issued 88,271 common shares priced at $.193675
per share as full settlement for $17,095.89 of accrued interest due pursuant to
the terms of a $2,000,000 loan provided by Salida Capital LP to the Company.
On June 7, 2013, the Company issued 351,900,000 common shares through a private
placement priced at $.02 per share, and separate to the placing, certain
directors of the Company subscribed for an aggregate 33,100,000 shares priced at
$.02 per share. The aggregate gross proceeds of the Fundraising were $7,700,000.
Fees relating to the private placement were $1,196,605 and included cash
commissions totalling $1,000,000 and a fee of $78,065 paid to Cenkos Securities
Plc. Cenkos also subscribed for 50,000,000 shares in the private placement.
8.2 Conversion of Convertible Debt
On March 12, 2013, the Company reached an agreement with Aponet Enterprises
Limited to amend the $0.65 conversion price of its US$4 million debenture,
issued as part of the acquisition of Inter Invest, to CDN$0.23, and to convert
the debenture into 17,391,305 common shares of EastCoal Inc. effective on that
date. The closing market price of the Company's shares on the day of the
conversion was $0.06.
8.3 Warrants
At June 30, 2013 and December 31, 2012 the following share purchase warrants
were outstanding:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Expiry Date Exercise Price June 30, 2013 December 31, 2012
----------------------------------------------------------------------------
May 31, 2014 $ 0.70 4,000,000 4,000,000
May 31, 2015 $ 0.35 2,916,000 2,916,000
May 31, 2015 $ 0.55 48,600,000 48,600,000
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55,516,000 55,516,000
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8.4 Stock options
The Company has established a stock option plan (the "Plan") to provide
incentives to employees, directors, officers, and consultants to carry out the
business of the Company. The Board of Directors may grant up to a total of
25,009,244 options, not to exceed 20% of the issued and outstanding capital
stock to employees, directors, officers, and consultants. The maximum term of
any option is ten years. The exercise price of an option is fixed at the time of
grant and is not less than the closing price on the TSX-V on the last trading
day preceding the grant date, less any discounts permitted by the TSX-V.
At June 30, 2013, a total of 8,075,000 options had been granted to directors,
officers, employees and consultants under the Plan, and were outstanding as
summarized below:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, 2013 December 31, 2012
-----------------------------------------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
----------------------------------------------------------------------------
Opening balance 10,575,000 $ 0.45 7,225,000 $ 0.48
Granted - - 3,650,000 0.42
Expired (2,500,000) 0.46 (300,000) 0.75
-----------------------------------------------------------
Ending balance 8,075,000 $ 0.45 10,575,000 $ 0.45
----------------------------------------------------------------------------
Options
exercisable 8,075,000 $ 0.45 10,575,000 $ 0.45
----------------------------------------------------------------------------
----------------------------------------------------------------------------
All stock options have exercise prices that are higher or equal to market prices
at the date of grant.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number Number
Expiry Date Outstanding Exercisable
----------------------------------------------------------------------------
September 15, 2014 1,975,000 1,975,000
July 27, 2015 1,200,000 1,200,000
February 4, 2016 750,000 750,000
March 14, 2016 750,000 750,000
July 6, 2016 750,000 750,000
January 19, 2017 150,000 150,000
May 31, 2017 2,500,000 2,500,000
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8,075,000 8,075,000
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----------------------------------------------------------------------------
9. Related party transactions
During the period ended June 30, 2013, the Company paid or accrued $30,000 (2012
- $14,550) to a related party for office costs, of which $30,000 (2012 -
$12,000) was paid or accrued to a company with a director in common and $nil
(2012 - $2,550) was paid to a director.
Consulting fees totalling $127,351 (2012 - $197,490) were paid or accrued to
directors and officers of the Company, of which $nil (2012 - $140,175) was
capitalized to the Verticalnaya mine project and $127,351 (2012 - $57,315) was
expensed.
Included in accounts payable and accrued liabilities is a total of $106,703
(December 31, 2012 - $151,224) due to related parties for office costs,
directors' fees, and consulting fees and expenses. Excluding interest payable in
accordance with the director's loan (Note 7.2.1), the amounts due to related
parties are unsecured, non-interest bearing and have no specific terms of
repayment.
On May 31, 2013 the Company entered into a short term loan agreement with its
major shareholder, Salida Capital International Corp for $350,000 (Note 7.2.2).
The loan was repaid in June.
10. Supplemental cash flow information
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the six months ended
June 30, 2013 June 30, 2012
----------------------------------------------------------------------------
Cash paid during the period for:
Interest paid $ 77 $ 539
Interest received 10 43
Income taxes paid - -
Non-cash financing and investing
activities:
Share-based compensation
included in mine/deferred
costs - -
Mine/deferred costs included
in accounts payable - 495
Share issuance costs included
in accounts payable - -
11. Segmented information
The Company's Verticalnaya and Menzhinsky mines are operated as separate
business units and are considered to be distinct operating segments based on
geographic location. The Company's identifiable property, plant and equipment
are located primarily in Ukraine. Geographic information is as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months ended For the six months ended
June 30, 2013 June 30, 2012 June 30, 2013 June 30, 2012
----------------------------------------------------------------------------
Loss for the
period
Verticalnaya $ (43) $ (18) $ (82) $ (34)
Corporate (1,190) (84) (461) (333)
Discontinued
operations
(Note 6) (18,366) (401) (37,111) (401)
------------------------------------------------------------
(19,599) (503) $ (37,654) (768)
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----------------------------------------------------------------------------
----------------------------------------------------------------------------
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June 30, 2013 December 31, 2012
----------------------------------------------------------------------------
Mineral properties
Verticalnaya $ 55,156 $ 47,996
Menzhinsky - 9,622
--------------------------------------------
55,156 57,618
--------------------------------------------
--------------------------------------------
Coal Stockpile - Menzhinsky
(long term) $ - $ 4,992
Property, plant & equipment
Verticalnaya $ 6,170 $ 5,886
Menzhinsky - 6,222
Corporate 10 7
--------------------------------------------
6,180 12,115
--------------------------------------------
--------------------------------------------
Intangibles
Verticalnaya $ 5 $ 6
Menzhinsky - 70
Corporate 242 251
--------------------------------------------
247 327
--------------------------------------------
--------------------------------------------
Goodwill - Menzhinsky $ - $ 4,940
Reclamation bond - Corporate $ 7 $ 7
Current assets
Verticalnaya $ 783 $ 1,309
Menzhinsky - 2,933
Corporate 4,269 9,081
Discontinued operations (Note
6) 20 -
--------------------------------------------
5,072 13,323
--------------------------------------------
--------------------------------------------
Total assets
Verticalnaya $ 62,114 $ 55,198
Menzhinsky - 28,778
Corporate 4,528 9,346
Discontinued operations (Note
6) 20 -
--------------------------------------------
66,662 93,322
--------------------------------------------
--------------------------------------------
Total liabilities
Verticalnaya $ 5,361 $ 5,962
Menzhinsky $ - $ 12,242
Corporate 2,380 8,399
Discontinued operations 18,774 -
--------------------------------------------
$ 26,515 $ 26,603
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12. Subsequent Events
12.1 Share consolidation
On August 8, 2013 the Company consolidated its shares on a ratio of ten (10)
pre-consolidation common shares to one (1) post-consolidation common shares,
consolidating the Company's 728,048,493 issued and outstanding common shares to
72,804,849 common shares following the consolidation.
The Company also consolidated its outstanding options and warrants on a ratio of
ten (10) to one (1), with the result that each consolidated option and warrant
will now entitle the holder to acquire one common share in the capital of the
Company at an exercise price equal to ten (10) times its original exercise
price.
FOR FURTHER INFORMATION PLEASE CONTACT:
EastCoal Inc.
Abraham Jonker
President
+1 (604) 681-8069
www.eastcoal.ca
Cenkos Securities plc
Ken Fleming/Alan Stewart/Derrick Lee
+44 (0) 131 220 6939
Tavistock Communications
Jos Simson/Emily Fenton/Mike Bartlett
+44 (0) 207 920 3150
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