American Resources Corp. Form 8-K Summary
Business Context and Reporting Period
Date of Report: February 21, 2017
Company: American Resources Corporation (formerly NGFC Equities, Inc.)
Reporting Period: Current Report (8-K) covering events through February 21, 2017.
The Company completed a reverse merger/acquisition of Quest Energy Inc. on January 5, 2017, with control transferring to Quest Energy shareholders on February 7, 2017. Consequently, the Company changed its name from NGFC Equities, Inc. to American Resources Corporation to reflect its new focus on coal mining and processing. The Company is now a holding company with operations primarily in eastern Kentucky and Indiana.
Key Financial Metrics
Revenue and Profitability: The filing states the Company has limited operating history and has incurred annual operating losses since inception. As of September 30, 2016, the accumulated deficit was $71,527. The filing does not provide specific revenue figures for the current period, noting that revenue is concentrated among a small number of customers and operations.
Cash Flow: The Company reported negative cash flow from operating activities of $395,988 for the fiscal year ended September 30, 2016. Management anticipates continued negative cash flow from operating and investing activities for the foreseeable future.
Debt and Related Party Obligations:
- Related Party Loan: Quest Energy loaned Quest MGMT LLC (owned by management) $4,120,000 to facilitate a New Markets Tax Credit loan. This amount is outstanding as of December 31, 2016.
- Related Party Consulting: Amounts earned under a consulting contract with Quest MGMT LLC total $17,840,615, all outstanding as of February 20, 2017.
- Related Party Note: A note of $178,683 is outstanding to Land Resources & Royalties LLC (owned by management) for the sale of non-essential assets.
- Surety Bonds: The Company has outstanding surety bonds at all mining operations totaling approximately $23.5 million.
Liquidity: The Company's independent auditors have included an explanatory paragraph in their opinion for the fiscal year ended September 30, 2016, indicating that the current liquidity position raises substantial doubt about the Company's ability to continue as a going concern. The Company has no existing bank credit facilities.
Material Changes vs. Prior Period
- Change in Control: Control of the Company transferred from the previous shareholders to the shareholders of Quest Energy Inc. via a Share Exchange Agreement. Quest Energy shareholders now hold 95% of the common stock on an as-converted basis.
- Capital Structure: The Company authorized and issued 4,817,792 shares of Series A Preferred Stock to Quest Energy shareholders. These shares are convertible into common stock at a rate of 100:1 and carry 1,000 votes per share on an as-converted basis.
- Corporate Name: The Company officially changed its name from NGFC Equities, Inc. to American Resources Corporation on February 17, 2017.
- Management Changes: Andrew Weeraratne resigned as CEO, CFO, and Director. Mark C. Jensen was appointed CEO and Chairman; Thomas M. Sauve was appointed President; and Kirk P. Taylor was appointed CFO.
- Asset Base: The Company now owns coal mining and processing operations in eastern Kentucky (McCoy Elkhorn, Knott County Coal, Deane Mining) and Indiana (Gold Star Mine), representing approximately 179 million tons of coal reserves across active and idled permits.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance: The Company expects to continue incurring net losses for the foreseeable future. It anticipates significant capital expenditures to restart idled mines and develop infrastructure. There is no assurance that the Company will achieve positive cash flow or profitability.
Material Risks:
- Going Concern: Substantial doubt exists regarding the Company's ability to continue as a going concern due to limited assets, operating losses, and lack of committed credit facilities.
- Regulatory and Environmental: Operations are subject to stringent federal and state regulations (SMCRA, CWA, Mine Act). Compliance costs are significant, and permitting delays or denials could halt operations. The Company faces potential liabilities for environmental reclamation and remediation.
- Market Volatility: Coal prices are volatile. The Company relies on short-term contracts and spot markets, exposing it to price fluctuations. Demand is tied to the steel industry (metallurgical coal) and power generation (thermal coal).
- Concentration Risk: Operations are geographically concentrated in eastern Kentucky. The Company relies on a limited number of customers and third-party brokers for sales.
- Related Party Transactions: Significant outstanding obligations to entities owned by management ($17.8M consulting, $4.1M loan) pose financial risks.
Unusual Items: The filing highlights that the Company is a "penny stock" subject to SEC Rule 15g-9, which imposes strict disclosure requirements on broker-dealers and may limit liquidity. Additionally, the Company has no independent directors and has not established an audit committee.
Investor Verification Checklist
- Going Concern Status: Verify the Company's ability to secure additional financing to cover operating losses and capital expenditures, given the auditor's "substantial doubt" qualification.
- Related Party Obligations: Confirm the terms and repayment status of the $17.8 million consulting fee and $4.1 million loan owed to management-owned entities.
- Operational Capacity: Assess the timeline and capital requirements for restarting idled mines (Carnegie Mine, Knott County, Deane Mining) to generate revenue.
- Regulatory Compliance: Review the status of mining permits and environmental reclamation bonds ($23.5 million) to ensure no "permit-blocking" issues exist under the Applicant Violator System.
- Stock Liquidity: Evaluate the impact of "penny stock" rules on the ability to sell shares in the secondary market.