American Resources Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited consolidated results. The company operates coal mining, processing and related assets, primarily in eastern Kentucky and western West Virginia, with an Indiana operation. It reported no proven or probable reserves under SEC Industry Guide 7.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $6.994 million | $7.325 million |
| Cost of coal sales and processing | $6.644 million | $5.473 million |
| Net loss attributable to shareholders | $10.066 million | $2.769 million |
| Basic and diluted loss per share | $0.48 | $2.96 |
| Cash used in operating activities | $5.743 million | $1.059 million |
Revenue less coal sales and processing costs was $350,189, approximately 5.0% of revenue, compared with $1.852 million, approximately 25.3%, in Q1 2018. Operating loss was $9.891 million, or approximately 141% of revenue, versus $2.493 million, or approximately 34%. These comparisons are affected by the company’s presentation and correction of prior-period information described below.
At March 31, cash was $7 and restricted cash was $471,640. Current assets were $2.138 million and current liabilities were $25.666 million, a working capital deficit of approximately $23.528 million. Debt carrying amounts included $14.935 million current long-term debt and $9.804 million long-term notes payable. The reclamation liability was $18.860 million. Total assets were $65.566 million and total liabilities were $52.003 million.
Changes and notable items
- Revenue declined about 4.5% year over year. Management attributed the decrease mainly to lower coal production while the Access Energy and Mine #15 deep mines underwent further development.
- Net loss widened substantially. Professional fees rose to $4.334 million from $275,000; general and administrative expense rose to $1.373 million from $477,000. The company also recorded $2.385 million of warrant expense and $1.672 million of stock issued for services, substantially contributing to reported costs.
- In February, the company acquired Empire coal and land assets for 2 million shares valued at $24.4 million, $500,000 cash and seller financing. It recorded $25.4 million of mining rights and $1.5 million of land; the acquisition was accounted for as an asset acquisition.
- Mine development increased by $25.4 million, primarily reflecting the acquired mining rights. Total stockholders’ equity improved from a $9.200 million deficit at year-end to $13.564 million, reflecting equity issuance and the acquisition-related share issuance, partly offset by the quarterly loss.
- The company raised $4.254 million net from common-stock sales and received $2.0 million under a development loan during the quarter. It made $1.373 million of long-term debt principal payments. On April 23, 2019, it drew the final $1.5 million under the customer development loan.
- The 2018 comparative statements were corrected for an earlier asset-retirement-obligation calculation error. The correction increased Q1 2018 net loss by $29,637 to $2.571 million and adjusted related balance-sheet amounts; the company characterized the earlier-period error as immaterial.
Outlook, risks and contingencies
- Management reported 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 pursue expansion and development, but states it needs additional securities sales or third-party loans, has no commitments for additional capital, and may have to cease operations if financing is unavailable.
- Management said PointRock was expected to restart production in 2019, with anticipated capacity of up to approximately 15,000 tons per month; the filing does not provide a quantified company-wide earnings or cash-flow forecast.
- The company reported only $7 of unrestricted cash at quarter-end, no available credit lines, and uncertainty about executing its funding plans. Its liquidity depends on operations, borrowings, equity issuance or other sources.
- Environmental permitting, reclamation, mine-safety regulation, coal-market competition and customer demand are material operating risks. Management described significant reclamation and remediation obligations associated with previously operated permits.
- The filing discloses a vendor settlement in default and ordinary-course claims for which potential losses could not be reasonably estimated. A reclamation-related matter was partially settled after quarter-end for $100,000, payable from a prior insurance policy; the remaining portion remained under settlement talks.
- Management concluded disclosure controls were not effective because of insufficient accounting and reporting staff and untimely reconciliations. It reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Availability, timing and terms of financing needed to address the going-concern uncertainty and working capital deficit.
- Operating performance and cash generation as mines undergo development, including whether PointRock’s anticipated restart occurs.
- Debt maturities, security interests, factoring obligations and the terms and repayment mechanics of the development and seller-financed loans.
- Basis and recoverability of acquired mining rights and other assets, and the company’s substantial reclamation obligations.
- Equity dilution from share issuances, warrants and service compensation; issued and outstanding Class A shares were 23,316,197 as of May 15, 2019.
- Remediation of the disclosed control weaknesses and the status and potential cost of legal, vendor and reclamation matters.