American Resources Corporation — Q2 2020 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2020. The company operates coal mining and processing assets in the Central Appalachian region and added American Rare Earth LLC and American Metals LLC in June. Coal operations were idled beginning in January 2020 and remained idled through the report date amid weak demand and COVID-19 disruption.
Financial performance and liquidity
- Revenue: Q2 revenue was $226,836, down from $9.34 million in Q2 2019. Six-month revenue was $751,170, versus $16.34 million in the comparable 2019 period. Q2 2020 revenue was from metal aggregation, processing and sales; coal sales were zero.
- Profit/loss: Q2 net income was $1.31 million, compared with an $8.96 million loss in Q2 2019. The Q2 result included a reported $6.82 million gain on sale of assets; operating loss was $2.81 million. Six-month net loss was $1.95 million, versus $23.53 million in 2019. Basic and diluted loss per share for the six months was $0.07.
- Expenses and margins: Six-month operating expenses were $7.82 million, compared with $29.58 million. The filing does not provide a clearly stated gross margin.
- Cash flow: For the six months, operating cash use was $1.06 million, investing cash provided was $418,000, and financing cash provided was $2.53 million. Cash and restricted cash totaled $2.15 million at June 30.
- Liquidity: Current assets were $2.22 million and current liabilities were $32.54 million, a working capital deficit of approximately $30.33 million. Unrestricted cash was $1.62 million; restricted cash was $536,000.
- Debt and obligations: Total liabilities were $66.77 million. Reported debt balances included $16.60 million current long-term debt, $4.73 million long-term note payable, and $14.52 million long-term convertible notes. Reclamation liabilities totaled $17.31 million, including $2.33 million current.
Material changes versus the prior period
- Revenue fell sharply year over year as coal production and sales declined and operations were idled.
- Six-month operating cash use improved from $7.38 million in 2019 to $1.06 million in 2020; financing cash provided also declined from $6.90 million to $2.53 million.
- The Empire transaction returned 2 million common shares and extinguished a $2 million seller-financing note in exchange for transferring properties and associated liabilities back to former parties. The company reported a $6.82 million asset-sale gain.
- Class A shares outstanding were 26.04 million at June 30, compared with 27.41 million at December 31, 2019. The filing reports 26.25 million shares outstanding as of July 22.
Outlook, risks and unusual items
- Management expects lower sales and gross margins in 2020 and potentially beyond, citing pandemic-related declines in steel and infrastructure demand. No quantitative earnings or revenue guidance is provided.
- 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 seek funding through securities sales or third-party loans, but reported no committed additional financing; unavailable financing could require cessation of operations.
- The company received $2.65 million under the Paycheck Protection Program; the note bears 1% interest and is due April 2022, with scheduled payments beginning October 2020.
- Disclosure controls were deemed ineffective because of insufficient accounting/reporting staff and untimely reconciliations.
- Permit transfers and reclamation bonding remain important execution risks. The filing says several subsidiaries have unabated or uncorrected violations that could affect approval of new permits. The company also disclosed reclamation obligations, regulatory assessments, and a disputed lease assumption relating to the Perry County acquisition.
- Related-party amounts included $548,000 of services incurred under an agreement with management-controlled Land Betterment Corporation during the six months; $400,000 remained payable at June 30. Amounts owed to management-linked Land Resources & Royalties were $885,000.
- The notes report a $1.06 million gain on the sale of non-core permits, while the statement of operations reports $6.82 million total gain on sale of assets; the filing text does not clearly reconcile these amounts.
Important facts for investors to verify
- Whether and when coal operations can restart, and the level of demand, pricing and cash generation needed to support them.
- Availability and terms of additional financing, debt maturities and the company’s ability to address its substantial working capital deficit.
- Reconciliation and accounting treatment of the reported asset-sale gains, including the Empire rescission and non-core permit sale.
- Status of permit transfers, regulatory violations, reclamation bonding and the disputed Perry County lease assumption.
- Progress on remediating ineffective disclosure controls and the implications of related-party service arrangements.