American Resources Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The company’s business changed materially following the February 7, 2017 completion of a share exchange that gave Quest Energy control of the registrant. The reported operations are principally coal mining and processing in Kentucky and Indiana.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / period-end comparison |
|---|---|---|
| Revenue | $6.612 million | $0.747 million |
| Coal sales | $5.718 million | None reported |
| Processing services income | $0.894 million | $0.747 million |
| Net loss from operations | $3.089 million | $8.821 million |
| Net loss attributable to ARC shareholders | $3.218 million | $8.825 million |
| Operating cash flow | $(0.026) million | $(0.875) million |
| Investing cash flow | $(0.062) million | $(3.690) million |
| Financing cash flow | $0.060 million | $4.668 million |
| Cash at March 31, 2017 | $0.756 million | $0.785 million at December 31, 2016 |
| Total assets | $18.554 million | $20.274 million at December 31, 2016 |
| Total liabilities | $48.503 million | $47.781 million at December 31, 2016 |
| Stockholders’ deficit | $(29.948) million | $(27.508) million at December 31, 2016 |
Coal sales and processing costs were $4.852 million, implying approximately $1.761 million of revenue less those costs, or a 26.6% margin before other operating expenses. Total operating expenses were $9.701 million. The filing reports basic and diluted loss per share of $6 and weighted-average shares of 498,633; share figures were retrospectively adjusted for a later 1-for-30 reverse split.
Current assets were $2.381 million against current liabilities of $27.405 million, a working-capital deficit of approximately $25.025 million. Current liabilities include $17.841 million of related-party management fees due on demand, $4.016 million of current long-term debt, and a $2.105 million current reclamation liability. The filing also reports $4.947 million of long-term notes payable and total reclamation liabilities of $18.255 million. Restricted cash was $0.221 million.
Changes, outlook and risks
- Revenue rose substantially from the prior-year quarter, primarily because underground mining operations restarted in September 2016. Coal sales were newly reported in Q1 2017.
- The reported shareholder loss narrowed from $8.825 million to $3.218 million. Management attributed the improvement mainly to the absence of $6.858 million in related-party consulting fees recorded in Q1 2016.
- Management states that recurring operating losses and the working-capital deficit raise substantial doubt about the company’s ability to continue as a going concern. It plans to expand existing coal operations and develop new ones, but says additional financing is needed and no financing commitments were in place. No specific operating guidance is provided.
- Subsequent to quarter-end, the company disclosed an October 2017 consolidated loan with $5.445 million advanced, including $5.240 million after March 31. It bears 7% interest, is due on demand, and is secured by Quest and subsidiary assets. Other subsequent financing and equipment purchases are also disclosed.
- Environmental compliance, mine safety, reclamation obligations, coal-market demand, competition and access to capital are significant risks. The company reports approximately 200 mineral and surface leases and substantial reclamation requirements. It guarantees certain Kentucky tax credits valued at $2.006 million, but states that recapture is considered remote and no liability was recorded.
- Management concluded disclosure controls were ineffective because of insufficient accounting/reporting staff and untimely reconciliations; outside consultants were engaged. The filing’s cover page also checks “No” for having filed all required reports during the preceding 12 months.
- The company reports no material pending legal proceedings and no disclosed off-balance-sheet arrangements. The filing notes ordinary-course claims for which potential losses cannot be reasonably estimated.
Important facts for investors to verify
- Reconcile the filing’s differing loss figures: the statements report consolidated net loss of $3.041 million and shareholder-attributable loss of $3.218 million, while MD&A states net loss of $3.118 million.
- Confirm the status, maturity, security and outstanding balances of the demand debt and factoring arrangements, and the treatment and collectability of the $17.841 million related-party fee payable.
- Assess liquidity and going-concern funding needs, including the availability and terms of subsequent financing and the company’s ability to fund operations and reclamation obligations.
- Review the detailed mine-safety disclosure, reclamation estimates and permits, and the implications of the ineffective disclosure controls and late-reporting indication.