American Resources Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company operates coal mining and processing businesses, primarily in eastern Kentucky, with an additional Indiana operation.
Financial performance and position
- Revenue: Q2 revenue was $7.02 million, up 61% from $4.37 million a year earlier. First-half revenue was $14.35 million, up 31% from $10.98 million. Growth reflected resumed Access Energy production and increased output at McCoy mines. Q2 processing-services income was zero, versus $510,157 in Q2 2017.
- Loss: Q2 net loss attributable to American Resources shareholders was $1.88 million, compared with $4.14 million in Q2 2017. First-half attributable net loss was $4.62 million, versus $7.20 million. Basic and diluted loss per share was $2.10 for Q2 and $5.18 for the first half.
- Cost and margin context: Revenue less reported coal sales and processing costs was $2.40 million for Q2, or about 34% of revenue, and $4.24 million for the first half, or about 30%. These amounts precede separately reported operating expenses, including development, depreciation, accretion, taxes and royalties.
- Cash flow: First-half operating cash outflow was $2.48 million, compared with $594,068 a year earlier. Investing activities provided $92,573; financing activities provided $2.94 million. Cash and restricted cash totaled $939,165 at June 30, including $692,837 unrestricted cash.
- Liquidity and debt: Current assets were $2.88 million and current liabilities $21.22 million, a working-capital deficit of approximately $18.34 million. Reported debt was $18.40 million, of which $13.12 million was current. Total liabilities were $47.17 million; stockholders’ deficit was $26.72 million.
- Reclamation obligations: Asset retirement obligations totaled $22.94 million at June 30, including $2.16 million assumed in the Point Rock and Wayland acquisitions during the period.
Material changes and unusual items
- The company acquired the Point Rock Mine in April and the Wayland Surface Mine in May, assuming related reclamation and other liabilities. Wayland production began in June; Point Rock was undergoing reclamation ahead of a planned restart later in 2018.
- A related-party accrued management fee of $17.84 million was forgiven in May and recorded as an increase in additional paid-in capital. This was a non-cash transaction and materially reduced reported liabilities.
- The company recognized a $315,000 gain from cancellation of debt. May financing included $2.15 million of notes bearing 33% interest, secured by future receivables and personal guarantees of two officers. Other new borrowing included short-maturity loans.
- Management attributed improved results primarily to higher coal volume and gross margin, and said increased export sales reduced taxes on customer sales.
Outlook, risks and contingencies
- Going concern: The filing states that recurring operating losses and a working-capital deficit raise substantial doubt about the company’s ability to continue as a going concern. Management plans to expand existing and develop new coal operations, but says additional capital is needed; no financing commitments were in place. Failure to obtain financing could require reduced development or cessation of operations.
- Near-term funding: In July 2018, the company drew an additional $517,000 on its business loan. It also entered a one-year digital marketing agreement requiring an initial 150,000 shares, monthly payments of $25,000 and quarterly grants of 150,000 shares.
- The company reported no material pending litigation, but described extensive environmental, mine-safety and reclamation requirements and associated potential costs. Management said ordinary-course claims could not be reasonably estimated, while not expecting their resolution to materially affect the business or financial position.
- Management concluded disclosure controls were not effective as of June 30, citing insufficient accounting and reporting staff and untimely reconciliations. No material change in internal control over financial reporting was reported during the quarter.
- No quantified earnings or revenue guidance was provided. Management’s stated operating plans and restart expectations are forward-looking and subject to financing, market, regulatory and execution risks.
Important facts for investors to verify
- Whether the company can secure sufficient funding to meet near-term obligations, given the working-capital deficit, operating cash burn and short-term, high-interest borrowings.
- Debt terms, repayment status and any collateral or guarantees, particularly the 33% notes and loans due within months.
- Progress and economics of the Point Rock restart and Wayland production, including royalty commitments and reclamation costs.
- Support and collectability for the $4.12 million note receivable and the assumptions underlying the $22.94 million reclamation liability.
- Share count and potential dilution: the filing reports 892,044 Class A shares at June 30 but 1,042,044 shares issued and outstanding as of July 30; reconcile the change and assess the marketing agreement’s share commitments.
- Remediation of the disclosed accounting-control weaknesses and timely completion of reconciliations.