American Resources Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results cover the company’s coal mining and processing businesses, primarily in Kentucky and Indiana. The January 2017 share exchange brought Quest Energy under American Resources; the filing says the transaction was accounted for as a recapitalization, with Quest Energy as accounting acquirer.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $4.352 million | $0.836 million | $15.334 million | $1.724 million |
| Operating loss | $1.585 million | $3.669 million | $8.686 million | $21.228 million |
| Net loss | $1.742 million | $3.718 million | $8.703 million | $21.368 million |
| Net loss attributable to company shareholders | $1.810 million | $3.718 million | $9.012 million | $21.368 million |
- Revenue mix: Nine-month coal sales were $13.770 million and processing services income was $1.564 million. Management attributed higher revenue primarily to underground mining operations commencing in September 2016.
- Margins and costs: Operating expenses totaled $24.020 million for the nine-month period, including $12.307 million of coal sales and processing costs, $4.173 million of development costs, and $3.465 million of production taxes and royalties. The filing does not present a gross-margin measure.
- Cash flow: Operating activities used $1.192 million in the first nine months, compared with $3.339 million used in 2016. Investing activities provided $0.270 million; financing activities provided $0.480 million. Cash declined from $0.785 million at year-end 2016 to $0.342 million at September 30, 2017.
- Liquidity: Current assets were $1.254 million versus current liabilities of $30.297 million, a working-capital deficit of approximately $29.043 million. Restricted cash was $0.189 million.
- Debt and obligations: The balance sheet reports $5.176 million of current long-term debt and $5.210 million of long-term notes payable. Total liabilities were $52.282 million. Reclamation liabilities totaled $18.881 million, and accrued management fees payable were $17.841 million, due on demand and non-interest-bearing.
- Equity: Stockholders’ deficit was $34.950 million. The filing reports 892,044 Class A common shares outstanding as of March 9, 2018.
Changes versus the prior comparable period
- Nine-month revenue rose to $15.334 million from $1.724 million, reflecting the operating coal business; the prior period is not directly comparable in business scale and composition.
- Nine-month net loss narrowed to $8.703 million from $21.368 million. Management cited $12.358 million of related-party consulting fees recorded in the 2016 period and none in 2017 as the primary reason for the lower loss. The 2017 period nevertheless included higher coal-related costs and production taxes.
- Cash decreased by $0.442 million during the first nine months of 2017. Accounts payable increased to $4.765 million from $2.196 million at year-end 2016, while current liabilities rose to $30.297 million from $25.397 million.
Outlook, risks, contingencies, and unusual items
- Going concern: The company disclosed recurring operating losses and a working-capital deficit that raise substantial doubt about its ability to continue as a going concern. It plans to expand existing coal operations and develop new ones but says it needs additional funding, has no committed financing, and may have to cease operations if financing is unavailable.
- Subsequent financing: On October 4, 2017, the company entered into a secured, 7% loan agreement with an unaffiliated entity. The filing reports $5.445 million advanced under the note, including $3.770 million after quarter-end; outstanding amounts are due on demand. Warrants for up to 5,017,006 common shares were issued with exercise prices ranging from $0.01 to $11.44.
- Reclamation: The company recorded $18.881 million of asset retirement obligations and $0.282 million of loss on reclamation settlements for the nine months. It identifies significant reclamation and remediation requirements across previously operated permits.
- Other exposures: The company guaranteed certain Kentucky tax credits valued at $2.006 million; it recorded no liability because management considered recapture or reduction remote. Management said ordinary-course claims and litigation were not expected to have a material adverse effect and disclosed no material pending legal proceedings.
- Operating and market risks: Coal operations face extensive environmental, permitting, reclamation, and mine-safety regulation, as well as competition and potential changes in demand related to regulation of coal use and emissions. Several mining permits and facilities are idled; the Gold Star Mine was also idled.
- Controls: Management concluded disclosure controls were ineffective because of insufficient accounting and reporting staff and untimely reconciliations. External consultants were engaged, but management still considered controls ineffective.
- Guidance: The filing provides no quantified earnings, production, or revenue guidance. Management’s stated plans depend on obtaining additional financing.
Important facts for investors to verify
- Availability, terms, and repayment status of the October 2017 secured demand loan and any further financing; review the substantial warrant dilution potential.
- Cash needs, near-term payment obligations, and the company’s plan to address its approximately $29.0 million working-capital deficit and going-concern uncertainty.
- Support for the $18.881 million reclamation estimate, bonding adequacy, and the timing and cost of required reclamation work.
- Collectability and terms of the $4.117 million long-term note receivable and $0.250 million related-party note receivable, including the disclosed defaults on the underlying $0.250 million notes.
- Potential dilution from Series B preferred stock, warrants, and other equity-linked instruments, and the effects of conversion-price adjustments and investor put provisions.
- The cover page marks “No” for having filed all required reports during the preceding 12 months and for required Interactive Data Files; confirm the filing-status implications. The report is signed March 9, 2018.