American Resources Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; this annual filing does not provide standalone fourth-quarter results. ARC’s business had shifted from its original natural-gas fueling plans to coal mining, processing and sales, primarily in Central Appalachia. The 2017 comparative figures below are presented as restated where applicable.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $31.52 million | $20.82 million |
| Coal sales | $31.20 million | $19.23 million |
| Cost of coal sales and processing | $24.99 million | $16.34 million |
| Net loss from operations | $11.50 million | $12.59 million |
| Net loss | $12.76 million | $12.59 million |
| Net loss attributable to ARC shareholders | $13.02 million | $12.99 million |
| Operating cash flow | $(3.37) million | $(5.64) million |
| Cash and restricted cash | $2.70 million | $0.39 million |
| Total assets | $41.36 million | $16.29 million |
| Total liabilities | $50.56 million | $53.46 million |
- Revenue grew approximately 51%, driven by a full year of Access Energy production and the start-up of Razorblade and Wayland. Net loss attributable to shareholders was nearly unchanged year over year.
- Derived gross margin was approximately 20.7% in 2018, based on revenue less reported cost of coal sales and processing. The filing does not present a conventional operating margin measure.
- Current assets were $4.26 million versus current liabilities of $26.43 million, a working-capital deficit of approximately $22.17 million. Stockholders’ deficit was $9.20 million.
- Cash used in operating activities improved to $3.37 million. Investing activities used $0.01 million and financing activities provided $5.70 million, including $8.43 million of long-term debt proceeds and $2.31 million of principal payments.
- Debt schedules report $22.21 million of notes payable before applicable discounts and issuance costs; the balance sheet classifies $14.17 million as current and $7.92 million as long-term. Interest expense was $1.29 million. Approximately $14.40 million of loan and lease principal was scheduled for 2019.
Material changes and unusual items
- Assets increased substantially, reflecting acquisitions and mine development, including PointRock, Wayland and Wyoming County Coal. The Wyoming County acquisition included $22.09 million of consideration funded with common shares.
- A related party forgave $17.84 million of accrued management fees. The filing recorded the forgiveness as additional paid-in capital, not as operating income; it materially reduced reported liabilities.
- Operating expenses included a $0.81 million gain on disposal of assets. The company also recorded $1.37 million of reclamation accretion expense and $3.82 million of development costs.
- The 2017 comparative financial statements were corrected for an asset-retirement-obligation calculation error. The company characterized the prior-period error as immaterial, but restated 2017 balances and results.
- Shares outstanding rose sharply during 2018, including conversion of Series A preferred stock and stock issuance for acquisitions and services. Subsequent to year-end, the company raised net proceeds of $3.70 million from a February 2019 equity offering and $0.56 million from an over-allotment.
Outlook, risks and contingencies
- Going concern: The auditor highlighted substantial doubt about the company’s ability to continue as a going concern, citing recurring operating losses and a net capital deficiency. Management expected to fund expansion through securities sales or third-party loans, but disclosed no committed additional financing and warned that unavailable financing could require cessation of operations.
- Management anticipated higher production expenses if customer demand continued to increase. PointRock was expected to restart production in 2019; the filing gives no quantitative earnings or cash-flow guidance.
- Coal operations face permitting, mine-safety, reclamation, environmental-compliance and coal-demand risks. ARC reported approximately $26.66 million of outstanding surety bonds at year-end and substantial reclamation liabilities. The company said its coal deposits were not classified as SEC-defined proven or probable reserves.
- Customer concentration was significant: four customers generated 89% of 2018 revenue, and two customers accounted for 99% of year-end receivables.
- Management concluded disclosure controls and internal control over financial reporting were ineffective, citing inadequate accounting staff and untimely reconciliations. The filing identifies a material weakness; management proposed increasing accounting staff but gave no assurance as to timing or success.
- Reported debt included a $1.0 million equipment-related note in default, other equipment notes in default, a defaulted vendor settlement at Deane Mining, and a $2.0 million Deane seller note in default. A separate $600,000 Wyoming County seller note was due in 2019; $150,000 was paid in January 2019.
- The company disclosed no material legal proceedings, while noting routine claims and an estimated $100,000 reclamation settlement under discussion at Knott County Coal.
Most important facts to verify
- Reconcile the MD&A’s stated 2018 operating expenses of $43.20 million with the financial statements’ $43.02 million total; the filing text does not provide a clear explanation for the difference.
- Review the full debt agreements, defaults, collateral and maturities—especially the 2019 principal schedule—and confirm how subsequent financing addressed liquidity needs.
- Assess the assumptions, funding and timing behind management’s going-concern plans, and the actual progress in remediating the internal-control material weakness.
- Validate customer concentration, receivable collectability and the sustainability of coal sales, production volumes and margins.
- Review reclamation estimates, surety-bond requirements, permitting status and the capital needed to restart or upgrade idle mines and facilities.
- Confirm the effects of subsequent equity conversions, offerings and the announced acquisition financing on share dilution, debt and liquidity.