American Resources Corp quarterly report, Q1 FY2016

Filing identity and reporting period

Important issuer mismatch: The supplied filing is for NGFC Equities, Inc., not American Resources Corp. It is a Form 10-Q for the three months ended December 31, 2015, the company’s fiscal first quarter of 2016. The financial statements are unaudited.

Business context

NGFC described three intended business divisions: energy and retail, healthcare, and consulting. In the quarter, reported revenue came from its 55%-owned healthcare subsidiary, ECI-LATAM, which installs and maintains medical equipment. The company said all ECIL revenue for the quarter came from one customer. Its planned fuel-station and natural-gas vehicle businesses had not yet launched.

Financial performance and liquidity

Other income included a $39,067 realized gain and a $55,834 unrealized loss on marketable securities, plus $1,007 of dividends. These investment items contributed to the consolidated net loss despite the smaller operating loss. The filing reports basic and diluted loss per share of $(0.00) for both periods.

At December 31, 2015, cash was $553,140, marketable securities $42,851, current assets $600,147, and current liabilities $22,167. Working capital was approximately $578,000. Total liabilities were current; they included a $6,400 unsecured related-party officer loan bearing 5% interest. The company reported total assets of $1,073,274 and accumulated deficit of $556,147. Cash increased by $108,365 during the quarter, mainly reflecting $168,370 of net cash from available-for-sale securities, partly offset by operating cash use and $12,154 of related-party loan principal payments.

Material changes versus the prior comparable period

• Revenue increased from zero to $84,865, while the company moved from a $28,000 operating loss to a $2,808 operating loss.
• Operating expenses rose to $69,038 from $28,000, including higher officer compensation and $12,750 of depreciation and amortization, primarily related to the acquired ECIL customer list.
• Investment results were more volatile: realized gains were $39,067 versus $494, while unrealized losses were $55,834 versus $2,852.
• Cash rose from $444,775 at September 30, 2015 to $553,140; marketable securities fell from $195,461 to $42,851. The officer loan balance declined from $18,554 to $6,400.
• Class A shares outstanding increased by 50,000 during the quarter, issued as consulting compensation.

Outlook, risks, and unusual items

• Management said it needed substantial additional financing to pursue fuel-station plans, estimating approximately $5.8 million per proposed operating unit and approximately $10 million to establish a presence in the energy division. It disclosed no financing commitments and warned that funding may not be available, potentially requiring dilution or curtailment of operations.
• The company estimated its parent-company monthly burn rate at $4,000–$5,000 and said available resources could support operations for 18–24 months. However, $489,492 of reported cash and marketable securities belonged to NGFC Limited Partnership, so not all reported liquidity should be assumed available for parent-company use. ECIL separately had $45,308 in cash and estimated monthly salaries and overhead of about $6,000.
• NGFC Limited Partnership had raised $485,350 from 13 limited partners as of the filing date and was seeking up to $1 million. Its investment results affect reported earnings, and its agreement provides for 70% of excess net asset value to limited partners and 30% to the general partner.
• Management disclosed that disclosure controls were not effective. It said it was developing a checklist and planned to add personnel as funding allowed.
• After quarter-end, the board decided to end the company’s relationship with Vanguard Energy, which had no operations, and to use its former owner as a consultant under a planned performance-based arrangement. La Veles was also removed from the animal-cream distribution activity; ECIL was expected to handle distribution.
• Management cautioned that interim results are not indicative of full-year results. It gave no firm revenue or earnings guidance. Its stated expectations for natural-gas demand and future station economics are forward-looking and depend on market development, financing, and execution.
• The filing reported no material litigation, senior-security defaults, or off-balance-sheet arrangements.

Most important facts for investors to verify

• Confirm the intended issuer: this document identifies NGFC Equities, Inc., not American Resources Corp.
• Check the availability and ownership of cash, particularly the $489,492 attributed to the partnership, and reconcile partnership fundraising with consolidated liquidity.
• Assess customer concentration at ECIL and whether it can secure additional customers; the filing says all quarter revenue came from one customer.
• Review the securities portfolio’s holdings, valuation changes, and trading-related risks, given the quarter’s significant unrealized loss.
• Evaluate the feasibility and terms of the large capital raises needed for the proposed energy business, and the potential for shareholder dilution.
• Review the disclosed ineffective controls and any subsequent remediation or changes in reporting reliability.