American Resources Corporation — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. The company operates coal mining and processing businesses, primarily in eastern Kentucky, with an Indiana operation that was idled. Revenue primarily comes from coal sales.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $7.325 million | $6.612 million |
| Coal sales | $7.306 million | $5.718 million |
| Processing services income | $19,516 | $893,983 |
| Operating loss | $2.464 million | $3.089 million |
| Net loss attributable to ARC shareholders | $2.740 million | $3.218 million |
| Loss per common share, basic and diluted | $2.93 | $3.60 |
| Cash used in operating activities | $1.059 million | $28,981 |
Revenue rose about 10.8%, while the operating loss narrowed about 20.2%. Coal sales increased, but processing services income fell substantially. The operating loss was approximately 33.6% of revenue, compared with 46.7% in Q1 2017. Cost of coal sales and processing was $5.473 million; development costs were $1.687 million; production taxes and royalties were $950,000. Interest expense increased to $247,154 from $128,533.
Financial position and liquidity
- At March 31, 2018, cash was $9,006 and restricted cash was $85,786, versus cash and restricted cash totaling $385,665 at December 31, 2017.
- Current assets were $3.068 million and current liabilities were $37.459 million, a working-capital deficit of approximately $34.391 million. Total liabilities were $61.206 million; total stockholders’ deficit was $42.704 million.
- Reported current portion of long-term debt was $10.164 million, and long-term note payable was $5.782 million. The company also reported $6.408 million in accounts payable and $17.841 million in accrued related-party management fees, due on demand and non-interest-bearing.
- Reclamation liabilities totaled approximately $20.344 million, including $2.379 million classified as current. Accretion expense was $448,000 in the quarter.
- Operating cash outflow was partly offset by $696,000 of financing cash flow, including $1 million in long-term loan proceeds. Investing activities provided $72,000.
Changes, outlook, and risks
- Management attributed higher revenue and lower net loss primarily to underground mining at the Access Energy Mine, which began operating in September 2017. Razorblade Surface was being prepared for extraction, with production anticipated in spring 2018; this was an expectation, not a quantified financial forecast.
- The company stated that it plans to expand existing coal operations and develop new operations. It expects to require additional financing through securities sales or third-party loans, but reported no commitments or arrangements for additional capital. Management warned that unavailable financing could require the company to cease operations.
- The filing identifies recurring operating losses and a working-capital deficit as conditions raising substantial doubt about the company’s ability to continue as a going concern.
- Subsequent events included a further $300,000 draw on the ARC business loan in April; a May equipment sale-leaseback financing that recorded a $1 million note due in September 2018; and acquisitions of permits in April and May involving assumed reclamation bonds and other consideration.
- Management said disclosure controls were ineffective because of insufficient accounting and reporting staff and untimely reconciliations. Outside consultants were engaged, but management continued to deem controls ineffective.
- Mining, environmental, reclamation, health and safety, coal-demand, and competitive risks are described. The company reported no material pending legal proceedings; it said potential losses from ordinary-course claims could not be reasonably estimated, but did not expect a material adverse effect.
Important facts for investors to verify
- Whether the company can obtain funding to address its substantial working-capital deficit and going-concern uncertainty, and the repayment terms and status of short-term borrowings.
- Recoverability and collection timing of the $4.117 million note receivable and $2.270 million of accounts receivable, alongside the large related-party payable and reclamation obligations.
- Whether planned and newly acquired mining permits translate into operating production, and the related costs, bonding, and environmental obligations.
- The filing’s cover page checks “No” for having filed all required reports during the preceding 12 months and for submitting required interactive data files; investors should verify the filing-status implications.