American Resources Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited consolidated financial statements. The company operated coal mining and processing businesses through subsidiaries, primarily in Kentucky and Indiana, following the February 2017 reverse-merger/share exchange with Quest Energy. The filing was signed February 28, 2018.
Financial performance
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 | Comparable 2016 period |
|---|---|---|---|
| Revenue | $4.37 million | $10.98 million | $0.14 million / $0.89 million |
| Net loss | $4.08 million | $6.96 million | $8.83 million / $17.65 million |
| Net loss attributable to ARC shareholders | $4.14 million | $7.20 million | $8.83 million / $17.65 million |
| Cash used in operating activities | Six-month period: $0.68 million | Six-month period: $1.94 million |
2017 revenue included coal sales of $9.58 million for the six-month period; the balance was processing-services income. Coal sales were nil in the comparable 2016 periods. For the first half of 2017, cost of coal sales and processing was $9.51 million; production taxes and royalties were $2.60 million, development costs including ARO settlement loss were $3.39 million, and depreciation was $1.16 million. The filing does not present a clearly labeled gross-margin measure.
At June 30, 2017, cash was $373,190, restricted cash was $230,470, current assets were $1.25 million, and current liabilities were $28.98 million, implying a working-capital deficit of approximately $27.73 million. Total assets were $16.99 million, total liabilities $50.51 million, and stockholders’ deficit $33.52 million. Current and long-term debt/note payable totaled approximately $9.41 million, excluding other liabilities. The reclamation liability was $18.69 million. Accounts payable were $4.19 million; accrued management fees of $17.84 million were due on demand and did not accrue interest.
Cash used in investing activities was $77,554 and cash provided by financing activities was $346,021 for the first half. Cash declined by $411,335 from year-end 2016. Financing included $600,000 of private-placement proceeds, alongside factoring-agreement proceeds and repayments.
Changes versus the prior period
- Revenue increased substantially as underground mining operations restarted beginning in September 2016. Management attributed the lower year-over-year losses mainly to the absence of related-party consulting fees recorded in 2016: $12.36 million for the first half of 2016 versus none in 2017.
- Operating costs rose with the increase in mining activity, including coal and processing costs, production taxes and royalties, and development costs.
- Cash used in operations and investing was lower than in first-half 2016, while financing cash flows were also substantially lower.
Outlook, risks and unusual items
- Going concern: Management disclosed recurring operating losses and a working-capital deficit that raise substantial doubt about the company’s ability to continue as a going concern. It planned to fund expansion through securities sales or third-party loans, but reported no financing commitments; failure to obtain funding could require cessation of operations. No numerical guidance was provided.
- Subsequent financing: After quarter-end, the company entered into a consolidated loan agreement under which $5.44 million had been advanced by the filing date, including $5.24 million after June 30. The 7% note is due on demand and secured by Quest and subsidiaries’ assets; warrants for up to 5.02 million common shares were issued with exercise prices ranging from $0.01 to $11.44. These are subsequent events, not June 30 balances.
- Other subsequent obligations and dilution: The filing describes equipment purchases and financing after quarter-end. Series B preferred stock is convertible at $3.60 per common share, subject to EBITDA-based conversion adjustments; certain qualifying events may also trigger an investor put option. The company reported 878,704 Class A shares outstanding at June 30 and 892,037 as of February 28, 2018.
- Reclamation and regulation: ARO was $18.69 million at June 30. The company cited extensive reclamation requirements and environmental, mine-safety and other regulatory costs and risks. It recorded a $251,852 loss on reclamation settlements in the first half.
- Other matters: A $250,000 related-party subsidiary debt purchase resulted in ARC holding two notes that were already in default, bearing 12% interest. The company also guaranteed certain Kentucky tax credits, but management considered recapture or reduction remote and recorded no liability. It reported no material pending litigation. The filing states there were no required off-balance-sheet arrangements.
- Controls and filing status: Management concluded disclosure controls were ineffective because of insufficient accounting/reporting staff and untimely reconciliations; outside consultants were used. The cover page marked “No” for having filed all required reports during the preceding 12 months. The filing’s Risk Factors item says “Not applicable,” despite the risks described in the filing.
Most important facts for investors to verify
- Availability, terms and timing of financing needed to address the going-concern uncertainty and severe working-capital deficit.
- Current status and repayment or restructuring terms of the $17.84 million accrued management fee, debt obligations, factoring arrangements and defaulted related-party notes.
- Collectibility and terms of the $4.12 million long-term note receivable and the $250,000 related-party note receivable.
- Updated reclamation estimates, bonding requirements, and any material environmental or mine-safety developments.
- Progress in remediating ineffective disclosure controls, and the reason the cover page indicates prior required reports were not all filed.
- Potential dilution and payment obligations arising from preferred-stock conversion terms, warrants, put rights and post-quarter financing.