American Resources Corporation (AREC) — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2020. AREC operates coal mining, processing and related assets, primarily in the Central Appalachian basin. The company said it filed late under SEC COVID-19 relief because pandemic-related disruption delayed preparation of the report.
Financial performance and condition
- Revenue: Coal sales were $524,334, down from $6.99 million in Q1 2019. Management attributed the decline primarily to lower production amid COVID-19 market disruption.
- Profitability: Net loss attributable to AREC shareholders was $3.26 million, versus $10.07 million a year earlier. Operating loss was $4.26 million versus $9.89 million. Other income of $1.41 million contributed to the lower net loss; the filing identifies a $1.06 million gain on sale of permits among unusual transactions. Basic and diluted loss per share was $0.12 versus $0.48.
- Costs and margins: Coal sales and processing costs were $1.86 million, exceeding revenue. Operating expenses totaled $4.78 million. The filing does not provide a clearly stated gross margin percentage.
- Cash flow: Operating activities provided $852,392, compared with $5.74 million used in Q1 2019. Investing activities used $408,915; financing activities used $253,056. Cash and restricted cash totaled $459,232 at quarter-end, including only $43,745 of unrestricted cash. The operating cash inflow included working-capital movements, including collection of receivables.
- Liquidity: Current assets were $640,889 and current liabilities $35.34 million, a working-capital deficit of approximately $34.69 million. Total liabilities were $67.44 million and stockholders’ deficit was $35.41 million. Management disclosed substantial doubt about the company’s ability to continue as a going concern.
- Debt: The balance sheet reported $17.94 million of current long-term debt, $5.42 million of long-term notes payable and $9.16 million of long-term convertible notes. The company received $1.60 million from senior convertible notes during the quarter; those notes carry 12.5% interest, a 24-month term and a $1.05 conversion price. Management said there was no available credit line and no committed source of additional capital.
Material changes versus Q1 2019
- Revenue fell sharply, while reported net loss narrowed. The company reported that several mines, including Mine #15, Carnegie and E4-2, were idled from January 2020 through the report date because of adverse market conditions associated with COVID-19.
- Operating cash flow improved to positive, but cash remained very limited and the company continued to have a large working-capital deficit.
- Convertible notes shifted from $7.42 million classified as short-term at December 31, 2019 to $9.16 million classified as long-term at March 31, 2020; the filing describes debt conversion and new note financing. The current portion of long-term debt declined from $20.49 million to $17.94 million.
Outlook, risks and unusual items
- Outlook: Management expected COVID-19 effects to reduce sales and gross margins. It planned to fund liquidity needs through cash, future borrowings and operating cash flow, while acknowledging uncertainty about executing that plan. No quantified earnings or revenue guidance was provided.
- Going concern and financing: Management said further financing would be needed to expand or develop operations, that no financing commitments existed, and that failure to obtain funding could require cessation of operations.
- Subsequent financing: After quarter-end, the company reported a $2.65 million Paycheck Protection Program note at 1% interest, due April 1, 2022, with scheduled repayments beginning October 2020. It also reported additional convertible-note settlements and conversions after March 31.
- Asset and liability settlements: On May 8, 2020, the company agreed to transfer Empire property back to former parties in exchange for cancellation of a $2 million seller note and return of 2 million common shares; Point Rock permits and associated reclamation liability were also transferred back. The quarter’s permit sale consideration was $700,000 cash plus $300,000 of equipment, which had not been received by the report date.
- Contingencies and regulation: The filing reports Kentucky Energy Cabinet assessments totaling $1.23 million, with $2.25 million accrued as payable to the Commonwealth including those amounts; MSHA assessments totaled $892,638, with $588,846 accrued. Permit transfers remained subject to regulatory approval, and the company disclosed unresolved violations that could affect issuance of new permits. Certain permit, seller-payment and reclamation-bond matters also remained unresolved.
- Controls: Management concluded disclosure controls were not effective, citing insufficient accounting and reporting staff and untimely reconciliations. Management said external consultants and review procedures supported the accuracy of the filed statements.
- Other risks: The company said it had not classified coal deposits as proven or probable reserves under SEC Industry Guide 7. Reclamation obligations totaled $19.85 million at March 31, 2020.
Key facts investors should verify
- Whether AREC can secure sufficient financing to address its substantial working-capital deficit and going-concern uncertainty.
- Whether operations resume, and the resulting production, sales and cash-flow effects as coal and steel-market conditions evolve.
- The status and terms of convertible-note funding, post-quarter debt conversions, and the PPP loan repayment schedule.
- Completion of permit transfers and resolution of regulatory violations, reclamation bonds, assessed claims and other disclosed contingencies.
- Reconciliation of the share count: the balance sheet reports 27,410,512 shares issued and outstanding at March 31, while the cover reports 26,040,512 as of June 17, 2020; subsequent share returns and issuances should be checked against this difference.