American Resources Corporation (NASDAQ: AREC) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Financial statements are unaudited. The company operates coal mining and processing businesses in Appalachia and Indiana and formed subsidiaries in 2020 focused on recovered metals and rare earth elements.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $294,646 | $1,847,279 | $1,045,816 | $18,183,681 |
| Operating loss | $2,234,432 | $7,076,252 | $9,300,445 | $20,321,934 |
| Net income (loss) | $123,982 | $(7,344,532) | $(1,829,148) | $(30,870,759) |
| Net loss per share, basic and diluted | $0.00 | $(0.30) | $(0.07) | $(1.34) |
- Revenue fell sharply year over year. Nine-month coal sales were $524,334, compared with $18.2 million in 2019; Q3 revenue was entirely from metal aggregating, processing and sales. The company attributed the decline to reduced coal production and COVID-19-related market disruption.
- Q3 net income was supported by $2.36 million of total other income, including a $1.71 million depreciation-recapture gain and $832,500 gain on forgiven interest; operations still generated a $2.23 million loss. Nine-month results included a $6.82 million gain on the Empire asset sale/settlement.
- At September 30, cash was $753,910 and restricted cash was $637,806. Current assets were $1.36 million versus current liabilities of $26.08 million, a working-capital deficit of approximately $24.72 million. Total liabilities were $62.95 million and stockholders’ deficit was $33.58 million.
- Reported debt included $12.47 million of current long-term debt, $4.73 million of long-term notes payable and $16.91 million of long-term convertible notes. The senior convertible notes carry 12.5% interest, a 24-month term, a $1.05 conversion price and warrants with a $1.50 exercise price.
- The cash-flow statement reports nine-month operating cash use of $2.10 million, investing cash provided of $417,857, financing cash provided of $2.81 million, and an increase in cash and restricted cash of $1.12 million. Management’s discussion gives different operating and financing cash-flow figures ($878,516 used and $1.58 million provided); the filing text does not reconcile the discrepancy.
- Coal operations were described as idled from January 2020 through the report date. Nine-month costs included $1.86 million of depreciation, $981,859 of reclamation accretion expense and $2.59 million of coal sales and processing costs. A gross margin is not clearly stated.
Changes, outlook and risks
- Management said COVID-19 and weaker worldwide demand for infrastructure, steel and metallurgical coal led to idled operations and were expected to constrain sales and gross margins in 2020 and possibly beyond. The filing provides no quantified production or earnings guidance and notes results may not indicate full-year performance.
- The company disclosed substantial doubt about its ability to continue as a going concern, citing recurring operating losses and a working-capital deficit. Management expects to seek securities sales or third-party loans, but reported no firm funding commitments; it warned that unavailable financing could force cessation of operations.
- After quarter-end, the company reported issuing 5.2 million shares at $2.50 per share on October 8, with net proceeds of $12.03 million, and additional warrant exercises. These transactions were not reflected in September 30 cash or share balances. The filing reported 35,602,410 Class A shares outstanding as of October 28, versus 28,400,512 at September 30.
- Reclamation liabilities totaled $17.55 million, including $2.33 million current. The company also cited environmental and mine-safety regulation, permit-transfer approvals, and unresolved violations as operating risks. Certain Kentucky Energy Cabinet and MSHA assessments were disclosed, with accrued payables of $2.03 million and $564,560, respectively.
- Management concluded disclosure controls were not effective due to insufficient accounting/reporting staff and untimely reconciliations. The company also disclosed related-party arrangements, including $1.26 million of 2020 service costs under an agreement with a management-controlled entity.
Important facts for investors to verify
- Reconcile the cash-flow amounts in the primary financial statements with the different figures in Management’s Discussion and Analysis.
- Confirm the status and terms of the convertible-note financing, debt maturities, defaults, and any required repayments.
- Assess whether post-quarter equity and warrant proceeds provide adequate liquidity, and account for the resulting dilution.
- Track whether coal operations restart, whether revenue recovers, and whether the company can secure committed financing.
- Review the adequacy and timing of reclamation obligations, permit transfers, regulatory assessments and internal-control remediation.