American Resources Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. The company operates coal mining and processing businesses and is also developing rare-earth and metal-recycling activities. Management said coal operations had been idled from January 2020 through March 29, 2021 because of COVID-19-related market conditions; the Perry County E4-2 mine restarted on March 29.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $10,646 | $524,334 |
| Operating expenses | $5,982,978 | $4,779,410 |
| Operating loss | $5,972,332 | $4,255,076 |
| Net loss attributable to shareholders | $6,389,857 | $3,261,368 |
| Basic and diluted loss per share | $0.14 | $0.12 |
| Net cash used in operating activities | $6,745,974 | $852,392 provided |
| Net cash used in investing activities | $2,840,000 | $408,915 |
| Cash and restricted cash at period end | $8,331,173 | $459,232 |
Revenue fell about 98% year over year, which management primarily attributed to reduced coal production during the pandemic. The filing reports no meaningful margin measure given the very low revenue and does not provide a clear gross-margin figure. Operating costs included $1.81 million of development costs, $1.08 million of general and administrative expense, and $710,032 of professional fees.
Financial position and liquidity
- At March 31, cash was $7.10 million, restricted cash was $1.23 million, and current assets were $7.73 million. Current liabilities were $26.60 million, implying a working-capital deficit of approximately $18.87 million and a current ratio of about 0.29.
- Total liabilities were $50.06 million, against total assets of $37.71 million; stockholders’ deficit was $12.35 million. Reported debt-related balances included $5.81 million of current long-term debt, $10.91 million of short-term convertible notes, $5.03 million of long-term notes, and $2.59 million of long-term convertible notes. These exclude reclamation liabilities and other payables.
- Management reported $6.75 million of operating cash outflow and $6.72 million of financing cash inflow for the quarter. Financing included $1.62 million of convertible-note proceeds, $2.06 million from warrant conversions, and $1.11 million from a restricted-stock sale.
Material changes and capital activity
- Net loss nearly doubled year over year, as operating loss increased and prior-year other income of $1.41 million did not recur; Q1 2021 other income was $35,296.
- Management said long-term debt principal fell by $8.14 million, primarily through conversion to Class A shares. The quarter-end share count was 50.0 million, versus 40.5 million at December 31, 2020; 51.9 million shares were outstanding as of May 12, 2021.
- The company invested in American Opportunity Venture, LLC, taking a 50% interest and managing-member role; it accounts for the investment under the equity method because it is not the primary beneficiary. The financial statements report an LLC investment of $2.275 million, while a note describes a $2.25 million investment.
Outlook, risks, and unusual items
- Going concern: Management disclosed recurring operating losses and a working-capital deficit that raise substantial doubt about the company’s ability to continue as a going concern. It expects to need additional securities sales or third-party loans, but reported no financing commitments; failure to obtain financing could require it to cease operations. No specific financial guidance was provided.
- Operations and permitting: The restart of E4-2 is recent, while several other mines and facilities remain idle or in development. Management noted that restarting idle operations could require significant capital and that regulatory approval may be affected by outstanding violations.
- Reclamation and claims: Asset retirement obligations totaled $18.16 million. The filing describes claims assessed by the Kentucky Energy Cabinet of $1.42 million, with $1.89 million accrued for amounts owed to the Commonwealth including those claims, and Mine Safety and Health Administration claims of $856,498, with $480,072 accrued. Management said the outcome of other routine litigation could not be reasonably estimated.
- Related-party and contingent funding: Amounts owed to Land Resources & Royalties, an entity controlled by management-related parties, were $712,872. Through its AOV investment, the company was proportionally obligated to fund American Acquisition Opportunity Inc. operating and working-capital deficits up to $800,000; $485,900 was outstanding at quarter-end and was repaid subsequently.
- Controls: Management concluded disclosure controls were not effective because of insufficient accounting/reporting staff and untimely reconciliations. It said external consultants and review procedures supported the reported financial information.
Important facts for investors to verify
- Reconcile cash-flow disclosures: the financial statements report Q1 2021 operating cash use of $6.75 million, while the MD&A contains conflicting cash-flow figures, including a statement of $852,392 provided by operations for 2021.
- Confirm near-term liquidity, available financing, debt maturities and conversion terms, and the effects of further equity or warrant issuance.
- Track production and sales after the March 29 restart, as Q1 revenue was only $10,646 and the filing provides no specific production or earnings guidance.
- Assess the status and costs of mine permits, outstanding regulatory violations, reclamation obligations, and disclosed claims.
- Review remediation of the ineffective disclosure controls and the company’s ability to meet reporting and reconciliation requirements.