Business context and reporting period
Filing identity discrepancy: The supplied filing is for NGFC Equities, Inc., not American Resources Corp. It is a Form 10-Q for the three months ended December 31, 2016 (fiscal first quarter 2017); figures are in U.S. dollars. The company reported primarily through its healthcare subsidiary, which provides installation, maintenance, and repair services for medical equipment. Its energy and retail divisions had not begun operations.
Financial results and liquidity
| Metric | Quarter ended Dec. 31, 2016 | Comparable 2015 quarter |
|---|---|---|
| Revenue | $56,129 | $84,865 |
| Gross profit / margin | $20,170 / 35.9% | $66,230 / 78.0% |
| Operating expenses | $36,733 | $68,538 |
| Operating loss | $(16,563) | $(2,308) |
| Net loss, consolidated | $(15,279) | $(18,568) |
| Net loss attributable to NGFC shareholders | $(20,572) | $(42,658) |
| Operating cash flow | $(17,977) | $(47,851) |
Cash and cash equivalents were $64,546 at December 31, 2016, versus $48,787 at September 30, 2016. Current assets were $70,834 and current liabilities $102,185, a working-capital deficit of $31,351 and a current ratio of approximately 0.69. Total assets were $76,579. The balance sheet reported a $50,000 Southridge loan payable and total liabilities of $102,185; the loan was due December 31, 2016, with 7% annual interest. Total deficit was $25,606. No clear gross debt total beyond the reported liabilities and loan is provided.
The cash flow statement reports $33,736 of cash provided by investing activities and no financing cash flow, resulting in a $15,759 net increase in cash. This conflicts with MD&A, which describes investing cash flow as zero for the quarter; the filing does not reconcile the discrepancy. No income taxes were paid; cash interest paid was $1,200.
Material changes versus the prior comparable period
Revenue fell about 34%, while gross profit declined about 70% and gross margin contracted by approximately 42 percentage points. Operating loss widened despite lower operating expenses, in part as cost of goods sold increased to $35,959 from $18,635. Consolidated net loss narrowed, but the loss attributable to NGFC shareholders remained $20,572. The 2015 comparison includes discontinued operations of NGFC Limited Partnership; that partnership was deconsolidated in 2016, limiting comparability. The company’s sole ECIL customer generated 100% of revenue in both periods.
At December 31, marketable securities were zero, compared with $35,020 at September 30. Accrued expenses fell to $2,692 from $72,992. During the quarter, the company issued 153,000 shares valued at $61,200 to settle accrued fees.
Outlook, risks, contingencies, and unusual items
- Going concern: The filing cites recurring losses, negative operating cash flow, a $1,251,734 accumulated deficit, and uncertainty regarding loan agreements as raising substantial doubt about the company’s ability to continue as a going concern. Management says it expects available funds and ordinary operations to support approximately 12 months of activity, but also says further funding will probably be needed and there is no assurance it will be available.
- Quest transaction: On January 5, 2017, NGFC signed a share exchange agreement with Quest Energy, a private energy-services company. The proposed issuance of 4,817,792 Series A preferred shares, convertible at 100 common shares per preferred share, was described as giving Quest shareholders 95% ownership immediately after closing. The transaction had not closed by the filing date and remained subject to conditions, including an 80% reconfirmation vote. The company said Quest was negotiating the Southridge loan, but the agreement was still unclosed.
- Financing: An effective equity-line arrangement permits Southridge to purchase up to $3 million of stock, with the filing describing a 90% discount to a $0.40 reference price and registration for up to 7.5 million shares. The filing does not establish how much had been drawn by the reporting date. Management anticipates additional fundraising may be needed.
- Operating concentration and execution: All quarterly revenue came from one customer. ECIL’s maintenance work was performed by its sole employee, and the company disclosed no formal distribution agreement for its animal-health cream. Its longer-term energy and retail plans had not commenced.
- Controls and legal matters: Management concluded disclosure controls were not effective and said it was developing a checklist and planned to add staff if funding became available. The company reported no material pending litigation and no off-balance-sheet arrangements requiring disclosure.
Important facts for investors to verify
- Confirm the filing’s issuer: the source is NGFC Equities, Inc., despite the request identifying American Resources Corp.
- Check the status and final terms of the Quest share exchange, including closing conditions, ownership dilution, and any effects on the Southridge loan.
- Reconcile the $33,736 investing cash inflow in the cash flow statement with MD&A’s statement that investing cash flow was zero; confirm the status of the $50,000 loan due December 31, 2016.
- Determine whether the Southridge equity line was drawn, the actual proceeds and pricing, and the resulting share dilution.
- Assess funding needs, cash runway, customer concentration, and remediation of ineffective disclosure controls.