American Resources Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited; comparative 2018 results are restated. The company operates coal mines and processing facilities in Appalachia and Indiana. It reported no SEC-defined proven or probable coal reserves.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1.85 million | $9.04 million | $18.18 million | $23.39 million |
| Operating loss | $7.08 million | $4.13 million | $20.32 million | $8.70 million |
| Net loss attributable to ARC shareholders | $7.34 million | $3.57 million | $30.87 million | $8.08 million |
| Basic and diluted loss per share | $0.30 | $3.44 | $1.34 | $8.58 |
| Cash used in operating activities | Not stated for quarter | Not stated for quarter | $11.69 million | $4.08 million |
- Q3 revenue fell approximately 80% year over year; nine-month revenue declined approximately 22%. Management attributed lower revenue and increased losses to reduced production, Mine #15 reorganization and development, and market conditions.
- Q3 cost of coal sales and processing was $2.96 million against revenue of $1.85 million. Nine-month cost was $15.25 million against revenue of $18.18 million. Higher depreciation and mining-rights amortization also weighed on results.
- At September 30, cash was $716,840 and restricted cash was $297,987. Cash and restricted cash together were $1.01 million, down from $2.70 million at year-end 2018.
- Current assets were $2.61 million and current liabilities $34.47 million, implying a working-capital deficit of approximately $31.86 million. Total liabilities were $60.72 million; total assets were $67.84 million and stockholders’ equity was $7.11 million.
- Balance-sheet current debt included $14.69 million of current long-term debt and $7.22 million of current convertible debt. Long-term notes payable were $4.83 million. The filing identifies multiple loans and seller notes as in default or past due.
- Operating cash outflow was partly offset by $9.68 million of financing cash inflow, including public equity proceeds. Investing activities provided $323,000, including cash received in acquisitions.
Material changes and unusual items
- Property and equipment, net, increased to $60.81 million from $32.57 million at year-end 2018, largely reflecting acquisitions. The Empire property acquisition included 2 million shares valued at $24.4 million and a $2 million seller note; that note was in default, and the seller sought payment and additional charges.
- The company acquired Gold Star assets in August and Perry County Coal assets in September. The Perry County acquisition included assumed reclamation and other liabilities; purchase allocations were provisional. A lessor disputed a lease assumption associated with the acquisition.
- Reclamation liabilities reached $23.75 million, including obligations assumed in the Gold Star and Perry County acquisitions. The company also reported assessed Kentucky Energy Cabinet claims of $783,340 and MSHA claims of $654,928; related accrued payables were $2.16 million and $580,628, respectively.
- Nine-month other expense included $7.72 million of debt-discount amortization and $2.55 million of warrant-modification expense. These non-cash charges contributed to the reported net loss.
- Class A shares outstanding increased from 17.76 million at December 31, 2018 to 27.27 million at September 30, 2019. The August public offering raised net proceeds of approximately $3.41 million and included warrants.
- Prior-year balances and results were restated to correct an error in asset-retirement-obligation calculations. The company described the error as immaterial to prior periods but corrected comparative statements in this filing.
Outlook, risks and management commentary
- No formal financial guidance was provided. Management said it intends to expand existing operations and develop new coal operations, but expects to rely on securities sales or third-party loans; it disclosed no committed additional financing.
- The filing states that recurring operating losses and a working-capital deficit raise substantial doubt about the company’s ability to continue as a going concern. Management warned that unavailable financing could require reduced mine development or cessation of operations.
- Management anticipated restarting the PointRock Mine in 2020. The filing also describes significant capital needs for bringing certain idle mines and facilities into service; some facilities had not yet received cost estimates for upgrades.
- Customer concentration is high: two customers generated 93% of Q3 revenue, and one customer represented 99% of accounts receivable at quarter-end.
- Several borrowings and seller obligations were in default, including the Empire seller note, inventory line of credit, certain short-term promissory notes, and other equipment or seller notes. WCC also faced a breach notice related to permit transfers, unpaid consideration and reclamation surety obligations.
- Management concluded disclosure controls were not effective because of insufficient accounting/reporting staff and untimely reconciliations. Management said external consultants and review procedures supported the accuracy of the filed statements.
- Coal demand, pricing, operating execution, environmental and mine-safety regulation, reclamation obligations, permit transfers, customer concentration, and access to capital are material risks described in the filing.
Important facts for investors to verify
- Financing availability, upcoming maturities, and the status and consequences of the numerous disclosed defaults; assess near-term cash needs against the reported cash balance and working-capital deficit.
- Whether Perry County and other acquisitions can be integrated and operated as planned, including final purchase allocations, disputed lease assumptions, permit approvals and reclamation obligations.
- Whether production and revenue recover, especially following Mine #15 reorganization and the planned PointRock restart, and whether acquired capacity can be used economically.
- The extent of dilution from outstanding warrants, options, potential debt conversions and subsequent share issuances.
- Reconcile the filing’s reported Q3 2018 shareholder net loss: the financial statements show $3.57 million, while MD&A cites $3.47 million. Also verify the differing Q3 loss-per-share figure against the comparative share data.
- Review the corrected 2018 comparative figures, customer receivable concentration, and the company’s remediation of ineffective disclosure controls.