American Resources Corporation — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; this is an annual report, not a standalone fourth-quarter report. The company’s control changed on February 7, 2017 through its share exchange with Quest Energy. ARC’s business shifted from its former natural-gas fueling focus to coal mining and processing, primarily in eastern Kentucky. The 2016 comparison is affected by acquisitions and different periods of subsidiary operations.
Financial results and condition
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $20.82 million | $7.60 million |
| Operating loss | $(14.02) million | $(21.85) million |
| Net loss | $(14.03) million | $(22.09) million |
| Net loss attributable to ARC shareholders | $(14.42) million | $(22.14) million |
| Cash used in operating activities | $(5.64) million | $(5.82) million |
| Total assets | $18.26 million | $20.27 million |
| Total liabilities | $58.36 million | $47.78 million |
- Revenue increased about 174%, which management attributed mainly to a full year of Mine #15 production and the start of Access Energy production in 2017. Coal sales were $19.23 million; processing services contributed $1.59 million.
- Revenue less cost of coal sales and processing was $4.48 million, compared with a $1.36 million shortfall in 2016. This is before depreciation, reclamation accretion, development costs, taxes and royalties, and other expenses.
- Operating expenses were $34.84 million, including $6.85 million of development costs, $4.97 million of production taxes and royalties, $2.56 million of depreciation, and $1.79 million of reclamation accretion. The company remained substantially loss-making despite the smaller loss than in 2016.
- Cash was $186,722; restricted cash was $198,943. Current assets of $2.70 million were far below current liabilities of $35.42 million, a working-capital deficit of approximately $32.72 million.
- Debt disclosures show approximately $14.85 million of notes and equipment-related obligations before current/long-term classification. Approximately $9.77 million of principal was scheduled for 2018. The company also reported $19.89 million of reclamation liabilities, of which $2.03 million was current.
- Stockholders’ deficit was $40.09 million. The balance sheet includes $17.84 million of accrued management fees payable, due on demand and without interest, under a related-party consulting agreement.
Changes, outlook, and key risks
- Operations included active mines at McCoy Elkhorn and Deane Mining; multiple other permits and facilities were idle or in reclamation. Gold Star Mine operations in Indiana were also idled.
- Management anticipated coal extraction at the Razorblade Surface mine in spring 2018. No quantified revenue, earnings, production, or cash-flow guidance was provided.
- The auditor issued an unqualified opinion on the financial statements but highlighted substantial doubt about the company’s ability to continue as a going concern, citing recurring operating losses and a net capital deficiency. The company said it would need additional financing, had no committed funding, and could have to cease operations if financing were unavailable.
- Financing included $4.44 million of net proceeds from long-term debt and $600,000 from private placements in 2017. The company’s loan agreement was secured by subsidiary assets and included warrants; it drew a further $1.30 million on that loan after year-end.
- Series B preferred shares accrue an 8% annual dividend in kind and are convertible into common shares. Outstanding warrants and convertible securities could materially dilute common shareholders; some Golden Properties warrants had a $0.01 exercise price and were subject to ownership limits.
- Revenue and receivables were concentrated: three customers accounted for 63% of 2017 revenue and 99% of year-end accounts receivable. Coal markets, customer demand, competition, mine safety rules, permitting, environmental compliance, and reclamation obligations are significant risks.
- Management found internal controls over financial reporting ineffective, citing insufficient accounting staff and untimely reconciliations. The filing also notes that directors were not independent and that the company had no audit committee or audit committee financial expert.
- The common stock traded thinly and sporadically on the OTC Pink Market; the filing cautions there was no established public market. Management reported no material legal proceedings, while the notes refer to claims for which potential losses could not be reasonably estimated.
Important facts for investors to verify
- Near-term liquidity, 2018 debt maturities, and whether the company obtained additional financing after the filing date.
- Production, sales, costs, and cash generation at active mines, including the timing and economics of the planned Razorblade startup.
- Terms and status of secured loans, defaults disclosed for certain equipment and seller notes, and the effect of warrants and preferred-stock conversions on dilution.
- Support for the $17.84 million related-party accrued management fee and the company’s ability to meet reclamation and remediation obligations.
- Progress in addressing the disclosed material weakness and customer and receivables concentration.