American Resources Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018. The filing covers the company’s coal mining and processing operations, primarily in Kentucky, with additional operations in Indiana. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $9.04 million | $4.35 million | $23.39 million | $15.33 million |
| Operating loss | $4.18 million | $1.58 million | $8.87 million | $8.69 million |
| Net loss attributable to ARC shareholders | $3.63 million | $1.81 million | $8.25 million | $9.01 million |
| Basic and diluted loss per share | $2.49 | $2.03 | $8.76 | $11.87 |
| Cash used in operating activities | Not separately provided | Not separately provided | $4.08 million | $0.95 million |
- Coal sales drove most revenue: $8.89 million in Q3 and $23.22 million for the first nine months of 2018. Processing-services income was $0.15 million and $0.17 million, respectively.
- Revenue increased about 108% year over year in Q3 and 53% for the nine-month period. Gross margin, calculated as revenue less coal sales and processing costs, was approximately 26% in Q3 and 28% year to date, versus approximately 36% and 20% in the comparable 2017 periods.
- At September 30, cash was $57,739 and restricted cash was $286,043. Current assets were $3.54 million against current liabilities of $25.14 million, a working-capital deficit of approximately $21.61 million.
- Debt was $19.70 million, including $14.63 million classified as current and $5.07 million long term. Total liabilities were $50.51 million; reclamation liabilities were $22.57 million. Stockholders’ deficit was $30.45 million.
- Financing activities provided $4.04 million in the first nine months; investing activities used $5,235. Cash and restricted cash together declined by $41,883 to $343,782.
Changes, outlook, and material matters
- Management attributed higher sales mainly to production at Access Energy, which began operating in September 2017, and increased production at McCoy’s Mine #15 and Carnegie. Management also cited improved gross margin and a greater proportion of export sales, which reduced taxes on customer sales.
- Despite higher revenue, Q3 operating and shareholder losses widened year over year. Nine-month shareholder loss improved, but operating loss increased slightly. Higher development, general and administrative, and professional-fee expenses contributed to the operating loss.
- The company acquired Point Rock and Wayland mining assets in 2018. Point Rock was undergoing reclamation work before a restart anticipated later in 2018; Wayland production began in June. The filing gives no quantified earnings or cash-flow guidance.
- A Point Rock-related asset disposition reduced reclamation obligations by $919,158 and generated a $807,591 gain. The company also reported a $315,000 gain from debt cancellation for the nine-month period. A related-party management fee payable of $17.84 million was forgiven and credited to additional paid-in capital.
- Financing risk is significant. A $1.0 million loan due September 24, 2018 had not been paid and was in default at quarter-end. May financing notes totaling $2.86 million carried a 33% interest rate, an original issue discount, and January 2019 maturity. The company also described a 7% business loan secured by company assets and due within two months of each advance.
- Management stated that recurring operating losses and the working-capital deficit raise substantial doubt about the company’s ability to continue as a going concern. It expects to seek funding through securities sales or third-party loans, but reported no commitments for additional capital and warned that unavailable financing could require operations to cease.
- Management concluded that disclosure controls were ineffective because of insufficient accounting and reporting staff and untimely reconciliations. It reported no material change in internal control over financial reporting during the quarter.
- Risks include substantial reclamation obligations and extensive environmental and mine-safety regulation. Management said ordinary-course claims and litigation were not expected to have a material adverse effect; no material legal proceeding was reported.
- Subsequent events included a November acquisition of coal permits and facilities funded with assumed reclamation bonds, 1,727,273 shares and two seller notes totaling $600,000; conversions of Series A and Series B preferred shares into common stock; and a further $300,000 advance under the secured 7% business loan.
Investor verification priorities
- Confirm the company’s near-term liquidity, ability to raise capital, and status of the defaulted $1.0 million loan and high-interest financing.
- Reconcile common shares outstanding: the balance sheet reports 1,192,044 shares at September 30, while the cover reports 17,715,969 at November 14, after subsequent preferred conversions and other share activity.
- Assess the amount, timing, funding requirements, and assumptions underlying the $22.57 million reclamation liability and acquired mine obligations.
- Review the collectability and terms of the $4.12 million note receivable from an entity owned by management members; the filing says related notes are in default and fully impaired, while the balance sheet reports a $4.12 million note receivable.
- Track whether production expansion and mine restarts improve operating cash flow, given increased year-to-date operating cash use and continuing losses.