Business context and reporting period
American Resources Corporation (NASDAQ: AREC) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company operates coal mining and processing businesses in the Central Appalachian and Illinois coal basins. It states that it has no coal reserves classified as “proven” or “probable” under SEC Industry Guide 7.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $9.34 million | $7.02 million | $16.34 million | $14.35 million |
| Net loss attributable to AREC shareholders | $8.96 million | $1.74 million | $23.53 million | $4.51 million |
| Net loss per share, basic and diluted | $0.38 | $1.95 | $1.07 | $5.05 |
- Revenue increased 33% in Q2 and 14% for the six-month period year over year. Management cited the May 2019 start of Carnegie 1 production and increased output from other mines.
- Coal sales and processing costs were $5.65 million in Q2 and $12.30 million for the six months. Revenue less these costs was $3.69 million in Q2 and $4.04 million for the six months, before other operating expenses.
- Operating losses were $3.35 million for Q2 and $13.25 million for the first half. The six-month net loss included $7.50 million of debt discount and issuance-cost amortization and $2.55 million of warrant modification expense. Management also cited warrant expense as a material driver; the MD&A’s stated combined figure does not clearly reconcile to the financial-statement line items.
- Cash was $1.13 million at June 30, 2019, plus $0.36 million of restricted cash. Current assets were $4.04 million and current liabilities $33.36 million, a working-capital deficit of approximately $29.32 million.
- Operating cash outflow was $7.38 million for the six months, versus $2.48 million in the 2018 comparable period. Investing cash outflow was $0.74 million; financing provided $6.90 million. Cash and restricted cash declined $1.21 million to $1.49 million.
- Balance-sheet debt lines included $15.53 million current long-term debt, $6.82 million current convertible debt, and $4.83 million long-term notes payable, or approximately $27.17 million combined. This excludes other obligations, including accrued interest and reclamation liabilities. Total reclamation liability was $19.18 million.
- Total assets were $65.77 million and total liabilities $55.04 million; stockholders’ equity was $10.73 million, compared with a $9.20 million deficit at year-end 2018. The company issued 2 million shares valued at $24.4 million as part of its Empire asset acquisition.
Material changes versus the prior comparable period
Revenue rose, but operating and net losses widened substantially. First-half general and administrative expense increased to $2.36 million from $0.94 million, and professional fees to $4.97 million from $0.44 million. Development costs rose to $4.49 million from $3.72 million. The 2019 loss also reflects substantial debt-discount amortization and warrant-related charges absent in the 2018 comparison. The company’s 2018 comparative financial information was restated for an error in the calculation of asset retirement obligations; management said the error was immaterial to prior periods but its correction affected comparisons.
Outlook, risks and unusual items
- Management plans to fund liquidity needs with cash, operating cash flows, and additional borrowing or securities issuance, and aims to expand existing and develop new coal operations. It reported no committed additional capital and warned that unavailable financing could require reduced development or cessation of operations.
- 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. No formal financial guidance is provided.
- PointRock Mine production was expected to restart in 2019, but had not begun under the company’s ownership as described in the filing. Bringing idle mines or facilities into operation may require significant, unquantified capital and is not assured.
- Subsequent to quarter-end, the company drew $400,000 on its ARC Business Loan, repayable in weekly installments beginning August 9, 2019, at 12% interest. It also entered an $500,000 note at 11%, due September 5, 2019, and drew $250,000 on it.
- Risks include substantial reclamation obligations, environmental and mine-safety regulation, coal-market and customer-demand exposure, and competition. A vendor settlement was in default; a reclamation-related case was partly settled, with the remainder still under discussion. Management said it could not reasonably estimate potential losses from claims generally.
- Management concluded disclosure controls were not effective because of insufficient accounting/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
- Near-term debt maturities, repayment terms, collateral, and access to further financing, including the post-quarter short-term borrowings.
- Cash burn, receivable collection, and the company’s plan and ability to address its substantial working-capital deficit and going-concern uncertainty.
- Whether production growth and any planned mine restarts can be achieved economically, and the capital required to activate idle mines and facilities.
- The accounting and cash implications of convertible debt, beneficial conversion features, warrant modifications, and equity-based compensation; reconcile the MD&A’s cited noncash expense total with the financial statements.
- Reclamation liability estimates, the status of the vendor default and pending reclamation matter, and progress in remediating the disclosed reporting-control weaknesses.